How you own your home can have a significant effect on what happens to it when you die.
For couples who own property together, there are two common ways of holding ownership:
Joint Tenants and Tenants in Common.
They may sound similar, but from an estate-planning perspective there is an important difference.
With one structure, your share of the property normally passes automatically to the surviving owner. With the other, you can potentially determine what happens to your share through your Will.
Understanding that distinction can become particularly important when inheritance tax, children from previous relationships or protecting a surviving partner are involved.
What Does Joint Tenants Mean?
When a property is owned as Joint Tenants, the owners jointly own the whole property rather than having separately defined shares.
The important estate-planning feature is the right of survivorship.
If one owner dies, their interest in the property normally passes automatically to the surviving joint owner.
It does not generally pass according to the deceased owner’s Will.
For many married couples and civil partners who simply want the surviving spouse or partner to own the entire home, this can be straightforward.
But straightforward does not necessarily mean appropriate for every family.
What Does Tenants in Common Mean?
With Tenants in Common, each owner has a separate beneficial share in the property.
That might be:
50% / 50%
but it does not necessarily have to be equal.
Because each person’s share is separately identifiable, their share can potentially pass according to their Will rather than automatically becoming the property of the surviving owner.
That creates additional estate-planning possibilities.
It also means the Will and property ownership need to work together correctly.
Why Does This Matter for Estate Planning?
Consider a married couple who each have children from previous relationships.
If they own their home as Joint Tenants and one dies, the property would normally pass to the survivor.
The surviving owner could subsequently change their Will, remarry, sell the property or make other decisions affecting where the wealth eventually goes.
That may be perfectly acceptable.
But if the intention was to ensure that part of the property’s value ultimately passes to the first person’s children, the ownership structure deserves closer attention.
Holding the property as Tenants in Common can potentially provide greater flexibility because each person’s share can be dealt with separately through their estate planning.
What About Inheritance Tax?
Changing from Joint Tenants to Tenants in Common does not by itself eliminate inheritance tax.
This is an important distinction.
Property ownership is only one component of an inheritance tax calculation.
The eventual position can depend on factors including:
the value of the property;
other assets within the estate;
whether the owners are married or civil partners;
who inherits the property;
available nil-rate bands;
the Residence Nil Rate Band;
lifetime gifts; and
the wider estate-planning structure.
Simply changing the form of ownership should therefore not be viewed as an inheritance tax solution on its own.
What Happens to the Residence Nil Rate Band?
A qualifying residence passing to direct descendants may potentially benefit from the Residence Nil Rate Band, subject to the relevant rules.
This can provide an additional inheritance tax allowance of up to £175,000 per individual under current rules.
However, the allowance can begin to taper where the value of an estate exceeds £2 million.
The way property passes on death can therefore interact with the wider inheritance tax position.
This is another reason why property ownership, Wills and inheritance tax planning should be considered together.
Can You Change From Joint Tenants to Tenants in Common?
It is possible to change the way jointly owned property is held.
Changing from Joint Tenants to Tenants in Common is commonly referred to as severing the joint tenancy.
But the decision should have a clear purpose.
Changing the ownership without reviewing the Will and wider estate plan can simply replace one problem with another.
The question should not be:
“Should everyone own their property as Tenants in Common?”
The better question is:
“Which ownership structure supports what we actually want to happen?”
Which Is Better?
Neither structure is universally better.
Joint Tenants may be appropriate where simplicity and automatic transfer to the surviving owner are the primary objectives.
Tenants in Common may provide greater flexibility where separate shares need to be controlled or where family circumstances are more complicated.
This can be particularly relevant for:
blended families;
second marriages;
unmarried couples;
unequal contributions to a property;
children from previous relationships; and
estates where succession needs more careful planning.
The appropriate structure depends upon the family, the assets and what the owners ultimately want to achieve.
Property Ownership Is Only One Part of the Plan
Changing how a property is owned should not happen in isolation.
Your property ownership, Will, inheritance tax position and wider estate should all support the same objective.
A technically correct arrangement can still produce the wrong outcome if the different parts of the estate plan are not working together.
The important question isn’t simply whose name is on the property today. It’s what should happen to that property when circumstances eventually change.
Want to Understand the Wider Inheritance Tax Picture?
Property ownership is only one factor that can affect how your estate eventually passes to your family.
Estate Architect looks across your property, pensions, investments and wider estate to identify potential inheritance tax exposures and planning issues.