Inheritance tax (IHT) is a crucial consideration for anyone looking to pass on their assets to loved ones after death. For those who own property jointly, understanding how inheritance tax on jointly owned property works can help them make informed financial and estate planning decisions. Jointly owned property can take various forms in the UK, and the way it is held has a direct impact on how inheritance tax is applied. This article explains how IHT is calculated for jointly owned property, the types of joint ownership, and strategies to minimise inheritance tax liability.
Understanding Joint Ownership in the UK
In the UK, property can be owned jointly in two ways: joint tenancy and tenancy in common. Each form of ownership affects not only the division of ownership but also the inheritance tax implications for the beneficiaries.
1. Joint Tenancy
Under joint tenancy, each co-owner holds an equal share of the property. If one of the owners dies, the deceased’s share automatically passes to the surviving owner(s), regardless of what the deceased has stated in their will. This process, known as the right of survivorship, means the property doesn’t go through probate for the deceased’s share, making the transfer to the surviving owner straightforward.
For example, if two people own a property as joint tenants and one passes away, the surviving joint tenant will inherit the deceased’s half, resulting in full ownership of the property.
2. Tenancy in Common
In tenancy in common, each co-owner holds a specific share of the property, which does not need to be equal. For instance, one person may own 40%, while another owns 60%. Each owner’s share is treated as a separate asset, and when an owner dies, their share does not automatically pass to the surviving owner. Instead, it becomes part of their estate and is distributed according to their will or under the rules of intestacy if no will exists.
Tenancy in common allows individuals to allocate their share of the property to a specific beneficiary, which can be helpful in estate planning but also brings unique inheritance tax considerations.
How is Inheritance Tax Calculated on Jointly Owned Property?
The application of inheritance tax on jointly owned property depends on the type of ownership (joint tenancy or tenancy in common) and the relationship between the co-owners.
Inheritance Tax for Joint Tenancy
Under joint tenancy, when one co-owner dies, their share of the property automatically transfers to the surviving co-owner(s) through the right of survivorship. However, the deceased’s share may still be subject to inheritance tax, depending on the relationship between the joint tenants and the total value of the estate.
If the surviving co-owner is a spouse or civil partner, the transfer is generally exempt from inheritance tax. The IHT exemption for married couples and civil partners means that a spouse or civil partner can inherit their deceased partner’s assets without paying inheritance tax.
For unmarried couples, siblings, friends, or other relatives, inheritance tax may apply. For example:
If an unmarried couple owns a property as joint tenants, the deceased partner’s share automatically passes to the surviving partner. However, the value of this share is added to the deceased’s estate, and if the estate exceeds the IHT threshold (currently £325,000), the excess is subject to inheritance tax at 40%.
For example, if an unmarried couple owns a property worth £600,000 as joint tenants, and one partner dies, the deceased’s share (£300,000) would typically be added to their estate. If this amount, combined with other assets, exceeds £325,000, the estate may incur inheritance tax on the excess.
Inheritance Tax for Tenancy in Common
With tenancy in common, each owner’s share of the property is considered a separate asset. Upon death, the deceased’s share doesn’t automatically transfer to the surviving owner but instead forms part of the deceased’s estate. This allows individuals to designate who will inherit their share in their will, providing more flexibility for estate planning purposes.
In terms of inheritance tax:
If a spouse or civil partner inherits the deceased’s share of the property, it is usually exempt from inheritance tax.
If a non-spouse inherits the share, it may be subject to IHT if the total value of the deceased’s estate, including their share of the property, exceeds the IHT threshold.
For example, if two siblings own a property as tenants in common, each holding a 50% share, the deceased sibling’s share will be added to their estate for inheritance tax purposes. If their estate surpasses £325,000, the excess may be taxed at 40%, impacting the overall inheritance for the surviving sibling or other beneficiaries.
Strategies to Minimise Inheritance Tax on Jointly Owned Property
There are various strategies to help mitigate inheritance tax liability on jointly owned property, especially for unmarried couples or those who own property with non-relatives.
1. Reviewing Ownership Structure
Couples or co-owners can consider switching from joint tenancy to tenancy in common. By holding the property as tenants in common, each co-owner can decide who will inherit their share, providing more control over how the property is passed on. Additionally, this arrangement can support effective estate planning, allowing individuals to assign their share to multiple beneficiaries or even place it in a trust.
2. Making Use of the Nil-Rate Band and Residence Nil-Rate Band
The nil-rate band is the threshold up to which an estate is not subject to inheritance tax (currently £325,000 per individual). In addition, the residence nil-rate band (RNRB) applies when a residence is left to direct descendants, such as children or grandchildren, allowing an additional £175,000 exemption per person.
For unmarried couples or other non-relatives, the nil-rate band and RNRB may be challenging to utilise fully, as these bands typically apply when leaving assets to family members. However, understanding these exemptions can be helpful when planning for heirs who are direct descendants.
3. Creating a Trust
Placing jointly owned property into a trust can offer tax efficiency while ensuring that assets are preserved for future beneficiaries. Trusts allow the property to be managed according to specific terms, such as allowing a partner to live in the property during their lifetime, with it eventually passing to children or other beneficiaries. Trusts need to be carefully structured to be tax-efficient and compliant with the latest inheritance tax regulations.
4. Using Life Insurance to Cover Inheritance Tax
Life insurance can be an effective way to cover inheritance tax liabilities. By taking out a life insurance policy and placing it in a trust, the policy payout can be used to pay any IHT due on the property without adding to the estate’s value. This approach can ease the tax burden for beneficiaries, ensuring they don’t need to sell the property to cover IHT bills.
5. Gifting Property Shares
While direct gifting of property can trigger capital gains tax, certain gifting strategies may reduce the value of the estate for IHT purposes. If the co-owners no longer need the property, they might consider gifting their shares, though this requires careful planning. Gifts become exempt from inheritance tax if the donor survives for seven years after making the gift, known as the seven-year rule.
The Importance of Professional Advice
Inheritance tax on jointly owned property can be complex, especially with different ownership structures and relationships affecting the tax implications. Consulting with a tax advisor or solicitor experienced in inheritance tax and estate planning is highly recommended. They can help co-owners understand their options, select the best ownership structure, and explore tax-efficient strategies tailored to their circumstances.
Conclusion
Inheritance tax on jointly owned property is influenced by factors such as ownership type, relationship between co-owners, and the total value of the estate. Joint tenancy provides a straightforward way for a surviving owner to inherit property through the right of survivorship but may result in inheritance tax liabilities for unmarried partners or non-relatives. Tenancy in common, on the other hand, offers more flexibility in directing inheritance but requires careful planning to manage inheritance tax implications.
For those concerned about the impact of inheritance tax, proactive steps such as reviewing ownership arrangements, exploring tax-efficient trusts, utilising life insurance, and considering gifting strategies can help minimise liabilities. Professional guidance can make a significant difference, ensuring that jointly owned property is managed in a way that best serves the interests of co-owners and their intended beneficiaries.
