Inheritance Tax: What Happens with Jointly-Owned Property?

Understanding inheritance tax is daunting for most of us, especially when jointly-owned properties are involved. The rules seem complex and knowing what you’ll owe, or what your loved ones will be faced with after you’re gone, can be unclear. Inews break down the essentials of how inheritance tax applies to jointly-owned properties and who’s responsible for footing the bill.

Understanding Joint Ownership

First off, let’s clarify what joint ownership actually means. There are two main types:

Joint Tenants

If you’re “joint tenants,” that means both (or all) owners’ names are on the deed, and you equally own the whole property. Regardless of who contributed what financially, each tenant has an identical stake in the property.

Tenants in Common

Conversely, “tenants in common” each own a specific portion of the property, which might be half, a third, a quarter, etc., depending on the number of owners and what’s been agreed upon. This arrangement is common when co-owners want to protect their respective shares, particularly if they’ve contributed different amounts to the property’s purchase.

Joint Ownership’s Impact on Inheritance Tax

The Scenario for Joint Tenants

When one owner dies in a joint tenancy, the surviving owner(s) automatically inherit the deceased’s share of the property. If the deceased’s total estate (including their share of the property) exceeds the tax-free threshold (known as the “nil rate band”), there may be inheritance tax due. However, if the co-owners were married or in a civil partnership, the surviving spouse or civil partner won’t have to pay inheritance tax on their inheritance.

The Complexities for Tenants in Common

For tenants in common, the deceased’s share doesn’t automatically go to the surviving co-owners. Instead, they can leave their share to anyone specified in their will. This is where things often get tricky.

William Stevens, head of financial planning at Killik & Co, emphasizes that the relationship between beneficiaries (those inheriting the will) and the co-owners is crucial, as this is frequently where disagreements arise.

If the deceased’s estate—including their share of the property—exceeds the nil rate band and other applicable exemptions, inheritance tax may be due. The executor of the deceased’s will, usually a family member or a legal professional, is responsible for arranging this payment from the estate.

Paying Inheritance Tax When Cash is Short

What happens if most of the estate’s value is tied up in property, leaving not enough cash to pay the inheritance tax bill? Selling the property is an option, but it’s complicated if the surviving co-owners don’t want to sell.

“It’s not usually possible to force a sale without a legal process, and even that might not succeed unless you have a significantly larger interest than the counterparty,” explains Stevens.

Thankfully, HMRC understands these challenges. Rules allow for the value of a deceased’s share in a jointly-owned property to be discounted, potentially reducing the inheritance tax owed. “The discount is normally between 10-15% but must be agreed upon with HMRC, who might require more information,” Stevens adds.

Moreover, you can opt to spread an inheritance tax payment over ten years, though you should be prepared to pay at least 10% upfront to secure probate. In situations where there’s not enough cash, taking out a loan is another solution, but remember, it’ll still need to be repaid eventually.

Planning Ahead is Key

Dealing with inheritance tax on jointly-owned properties can be complex, and the stakes are high. Proper understanding and effective estate planning are crucial to ensure your loved ones aren’t overburdened when the time comes. Consider seeking professional advice to navigate these murky waters, making the process manageable and less daunting for everyone involved.