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By Judith Robertson and Laura Gabrel

A recent First-tier Tax Tribunal (FTT) case highlights the importance of careful will drafting to provide for how jointly-owned property should pass on death.

Joint ownership of property in England and Wales - background

Where a property has a sole owner, they are legally and beneficially entitled to the entirety of the property. On that owner’s death, the property will pass in accordance with that individual’s will (or, if they have no will, in accordance with the intestacy rules).

There are two ways by which individuals can jointly own property and each has different implications as to how the property passes on death.

Joint tenancy is a form of ownership whereby the property is owned equally by all parties, who have equal rights to the property. On the death of one owner, that owner’s share passes automatically to the surviving co-owners (this is known a ‘survivorship’). An individual cannot pass on ownership of their share of property by their will.

In contrast, ownership as tenants in common means that each individual has their own defined share of the property. The property can be owned in whatever shares the parties agree (it does not need to be 50/50). When one of the co-owners dies, their share of the property will pass in accordance with the terms of their will.

Will drafting and tenants in common

It is common for individuals to want to ensure that, after they have passed away, the person with whom they share a home can remain living in the home for as long as they wish to do so, but with the capital benefit of the deceased’s share eventually passing to somebody else.

Where two people own a property as tenants in common, when one co-owner dies the other will still have the right to occupy the property, whether or not they have been left any formal interest in the deceased co-owner’s share(1) . However, if the deceased co-owner has left their beneficial interest by will to somebody other than the surviving co-owner, there is a potential for conflict between the interests of the person living in the property, who is likely to want to continue doing so, and those who have inherited a share in it, who may wish to sell and realise cash as soon as possible.

Where one co-owner wishes to sell, and another does not, the party wishing to sell would need to apply for an order for sale(2). Obtaining such an order is not a certain outcome, as the Court will take into account a number of factors, but making (or defending) an application to Court is certain to cause cost and anxiety for all involved.

Even if those who have inherited a share in the property are happy for the co-owner to remain living there, the decision might be taken out of their hands if they were to experience divorce or become bankrupt.

In light of this, wills are often drafted so as to give the co-owner an explicit right to remain living in the property, so as to avoid conflict between the surviving co-owner and the individual(s) who will ultimately benefit from the deceased’s half share in the property about when (and if) the property should be sold.

This might take the form of a basic right of residence, which gives the beneficiary a right to live in the property, rent-free, for as long as they wish to do so, but with no further entitlement after they move out.

Alternatively, wills can be drafted so that the beneficiary has an interest in possession, or ‘life interest’, in the property which gives more extensive rights, not just to continue to occupy the property rent-free, but also to receive any rental income from the property (if it is rented out), occupy any replacement property purchased with the proceeds of sale of the original property, or receive income produced by the proceeds of sale (if no replacement property is purchased).

In each case, the ongoing payment of expenses in relation to the property needs to be considered – the surviving co-owner is often expected to meet the costs of utilities, insurance and maintenance of the property.

Tax considerations

Where a beneficiary is granted a life interest in a share of a property, if that life interest continues until the date of their death the share will be treated as part of their estate for inheritance tax (IHT) purposes. For the purposes of calculating any IHT due, the value of the life interest property will be added to the value of the assets owned by the beneficiary in their own name, and the beneficiary’s nil rate band (and, where relevant, the residential nil rate band), will be shared proportionately between the two. IHT is then charged at 40%. The half share in the property would therefore potentially be subject to IHT on the death of both the first owner and the second owner (unless the surviving co-owner is a spouse or civil partner).

The same IHT treatment also applies to a right of residence, notwithstanding the fact that the benefits it confers are less extensive than a life interest, and it is important to remember that the treatment would also apply to any kind of ‘lease’ or ‘licence’ for life type arrangement.

If a surviving co-owner given a right of residence by will moves out of the property and gives up that right (or if the recipient of a life interest gives up that life interest), this will be treated for tax purposes as though they had made a potentially exempt transfer of the deceased co-owner’s share of the property. They would need to survive for seven years from the date of that transfer in order for the share to fall out of their estate for IHT purposes.

If the will were silent on the surviving co-owner’s right of residence, relying on the co-owner and the persons to whom the property is to pass coming to an informal arrangement regarding the surviving co-owner’s continuing occupation, the above IHT treatment would not apply on the surviving co-owner’s death (as they would not have a life interest or a right of residence).

Margaret Vincent v HMRC

The recent FTT case of Margaret Vincent v HMRC [2019] TC7432 is a helpful reminder of the tax implications discussed above. A married couple co-owned their home as tenants in common with the wife’s brother. The property, ‘Hopefield’ was subject to a declaration of trust specifying that the parties owned the property in shares: 3/8 to the couple (Mr and Mrs Hadden) and 5/8 to the brother (Mr Thom). All three individuals made wills around the time of the purchase of the property. Mr and Mrs Hadden executed mirror wills, under which their 3/8 share in Hopefield passed to their daughter (Mrs Vincent) on the second death, subject to Mr Thom being permitted to reside there for as long as he wished, provided that he paid for utilities, insurance and ‘maintenance repairs’ of the property. Mr Thom’s own will left his 5/8 share in the property to Mrs Vincent absolutely.

Mr and Mrs Hadden died in June and October 2001 respectively. Mr Thom died in 2013. HMRC issued a determination assessing Mr Thom’s estate to IHT on the whole value of the property, rather than just his 5/8 share, on the basis that he had an interest in possession in the remaining 3/8 share. Mrs Vincent appealed, stating that only Mr Thom’s 5/8 share ought to bear IHT on his death.

The FTT dismissed Mrs Vincent’s appeal and concluded that IHT was payable as a result of his death on the value of the entire property. Their reasoning was as follows:

1. As a beneficial owner of 5/8 of the property Mr Thom had an entitlement to occupy the entirety of Hopefield without the need for payment, even without the provision which had been made for him in the Haddens’ wills(3).

2. Despite Mrs Vincent’s submissions that her parents did not intend to confer an interest in possession (but simply wanted to express the wish that he should be able to remain in the property after their deaths) and that the will should be interpreted flexibly, the wording in the will went beyond a mere expression of wish that he should be allowed to remain in occupation at Hopefield for as long as he wished. The Haddens intended to give Mr Thom security by ensuring that his occupation could not be disturbed by a forced sale instigated by Mrs Vincent under TLATA in the case of a breakdown in family relations (though there was no suggestion that any such breakdown was likely to have taken place).

3. Giving legal effect to the words in Mrs Hadden’s will, an interest in possession had been created in favour of Mr Thom.

Conclusion

This case offers a warning when estate planning: drafting a will so as to give security of occupation to a co-owner will be likely to have tax consequences, and the testator should be aware of this when preparing their will. If a testator does not intend to give their co-owner a formal right to reside in a property after their death, but simply to express a non-binding wish that the co-owner should be allowed to continue living there, their will should be carefully drafted so as to achieve that outcome.

The case is also a useful reminder of the importance of taking appropriate professional advice as soon as possible after somebody has died to ensure that the tax implications of their will are understood and that steps can be taken to mitigate unexpected tax where possible.

12 February 2020

This article is for informational purposes only. It does not constitute legal advice, and should not be relied upon as such. If legal action is contemplated, specific advice should be sought separately.

1. s12 of the Trusts of Land and Appointment of Trustees Act 1925 (‘TLATA’)

2. s14, TLATA

3. TLATA, s12

Bull v Bull CA [1955] 1 QB 234