You may have heard the phrases ‘joint tenants’ or ‘tenants in common’ in relation to jointly held property. Although both terms have ‘tenant’ in the title neither relate to renting or ‘tenancies’ in the everyday understanding of the word, but refer to joint ownership. This legalese is confusing and on the face of it irrelevant, but the implications can be far reaching so worth exploring further.
In essence ‘joint tenants’ own the property together, and the survivor automatically takes ownership of the whole on the death of the other. This is the most usual way of owning property, and most commonly between spouses.
The phrase ‘tenants in common’ also refers to jointly owned property, but it is different. The property can however be owned in unequal shares, often in proportion to how much money each party has put in. The main difference comes when one of the owners dies, their share of the property does not automatically pass to the other, but remains as part of their estate and passes in accordance with their will, or if there is no will, in accordance with the rules of intestacy. This allows for the deceased’s nil rate band to be used.
Often it is beneficial to own property jointly as ‘tenants in common’ for this reason, particularly when the family home is valuable and over the Inheritance Tax threshold. This is because over time use can be made of the both spouses nil rate bands. As a general rule more Inheritance Tax becomes payable when assets are grouped together with one individual, rather than be spread out amongst family members at an earlier opportunity.
The most common scenario is a married couple owning the family home as ‘joint tenants’. When the first spouse dies, the jointly owned property would pass automatically to the other spouse. There would be no Inheritance Tax to pay on the family home because of the ‘spouse exemption’ (this means gifts to spouses are exempt from Inheritance Tax), but this often means their nil rate band is not used. A house in London is particularly prone to being over the Inheritance Tax threshold.
When the second spouse dies he/she would often leave the family home to their children, but they then only have one nil rate band to use. From a tax perspective all is not lost however, as in this situation the first spouse to dies nil rate band can be used also this is called a transferable nil rate band. In effect Inheritance Tax would only then become payable over £650,000, rather than just £325,000. It would be advisable to use a solicitor to help you with this.
How do I know whether property is held as joint tenants or tenants in common?
You or your solicitor can apply to the Land Registry to find out. The title to the property is recorded on what are known as ‘Office Copies of the register’ and it should be designated on there if the property is owned as ‘tenants in common’. If not you can assume it is held as joint tenants, but this part of the register is not always kept as accurately as it should be, and occasionally enquiries need to be made with the solicitors who undertook the conveyancing work for the property. If the property was purchased more than six years ago, often the solicitors won’t have kept the file however.