When two people own a property together the property will be held, in terms of legal title, either as ‘joint tenants’ or as ‘tenants in common’. The primary difference is that when a property is owned as ‘tenants in common’ each party owns a distinct, identifiable share in the property. This may happen, for example, if one of the parties contributes a larger amount to the purchase of the property than the other, and as a result they agree that the party contributing the larger portion of the purchase price will own a larger share of the property. When one party passes away a property owned as ‘joint tenants’ will automatically pass to the other owner, but when the property is owned as ‘tenants in common’ the deceased person’s share can be passed to a third party by way of their will.
This can have a significant implication for the amount payable in Inheritance Tax. The generally accepted approach, as per HMRC’s Inheritance Tax Manual is to apply a discount to the value of the deceased person’s share of the property on account of the difficulty of selling a share of a jointly owned property. The discount can vary depending on what percentage of the property each party owns and is increased where the other owner has a right to carry on living in the property.
If the surviving joint tenant is in occupation of the property in question at the date of death and both parties own a 50% share, the standard approach is to reduce the value of the deceased share by 15%. So, 50% of a property with a value of £800,000 would be reduced from £400,000 by 15% to £340,000 for Inheritance Tax purposes.
If the surviving joint tenant is not in occupation of the property and both parties own a 50% share, the standard approach is to reduce the value of the deceased share by 10%. So, 50% of a property with a value of £800,000 would be reduced from £400,000 by 10% to £360,000 for Inheritance Tax purposes.
If the ownership split is not 50/50 the situation can become more complicated. Generally, if the deceased share is less than 50% the reduction in the value of the deceased share allowed by HMRC will be greater (although rarely in excess of 20%) to reflect the disadvantage and loss of decision making power associated with owning a minority share of a property. If the share is greater than 50% the value of the deceased share allowed by HMRC may be lower, reflecting the improved control afforded to the majority owner of a property.
Some special provisions apply for spouses and civil partners where the property in question is comprised of the estate of the spouse or civil pater, and in those circumstances no discount is applied.
Dealing with Inheritance Tax can be complicated and difficult, and in most cases it will be necessary to take specialist advice from a solicitor and / or a tax adviser. Where the value of the estate is over (or close to) the Inheritance Tax threshold a valuation of the property in question will typically be needed. Our surveyors regularly undertake valuations for Inheritance purpose. If you would like to arrange a valuation of your property you can contact the team by telephone on 020 7183 2578 or by email.