When several individuals co-own a property, there are two possible ways in which the property can be legally held: as ‘joint tenants’ or as ‘tenants in common’. The main distinction lies in the fact that, when a property is owned as ‘tenants in common’, each party possesses a distinct and identifiable share in the property. This arrangement may arise when one party contributes a larger sum towards the property purchase, leading to an agreement that the larger contributor will own a proportionately larger share of the property.
In the event of the passing of one co-owner, a property held as ‘joint tenants’ automatically transfers to the surviving owner. Conversely, in the case of a property owned as ‘tenants in common’, the share belonging to the deceased individual can be bequeathed to a third party through their will.
This can have a significant implication for the Inheritance Tax payable. According to HMRC’s Inheritance Tax Manual, it is commonly accepted to apply a discount to the value of the deceased person’s share in a jointly owned property. This discount reflects the challenges associated with selling a share of a property held in joint ownership. The specific percentage of the discount can vary based on the proportion of property ownership assigned to each party. Furthermore, if the other owner retains the right to continue living in the property, the discount is typically increased.
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%. By way of illustration, 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%. By way of illustration, 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.
In cases where the ownership split is not evenly divided at 50/50, the situation can become more complicated. Typically, if the share owned by the deceased is less than 50%, HMRC allows for a larger reduction in the value of the deceased share (often up to 20%) to account for the disadvantages and diminished decision-making power that come with owning a minority share of a property. Conversely, if the share owned by the deceased exceeds 50%, the value of their share allowed by HMRC may be reduced to a lesser extent. This adjustment reflects the enhanced control enjoyed by the majority owner of the 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 partner; in those circumstances no discount is applied.
Navigating Inheritance Tax can be a complex and challenging task, often requiring the expertise of a solicitor and/or a tax adviser. Particularly when the value of the estate surpasses, or comes close to, the Inheritance Tax threshold, it is generally advisable to seek professional guidance. In such instances, a valuation of the property is typically required to accurately assess its worth and determine the applicable tax implications. Our surveyors regularly undertake valuations for probate and inheritance purpose. If you would like to arrange a valuation of your property, please call our experienced team on 020 7183 2578 or send your enquiry by email.