How do you own your home?
The way you own your home could have implications you might not be aware of.
It is important to understand how this could affect you, particularly in relation to your inheritance planning.
When two or more people own property together, there are two ways they can hold the property:
Beneficial joint tenants - if one of the owners dies, the survivor will own the whole property.
Tenants in common - each owner owns a share of the property, which can then pass to whoever they wish under the terms of their will.
As with most things, there can be pros and cons to each method and your own circumstances can often dictate which is most advantageous for you.
It is possible to change from one method to the other. If you hold a property as beneficial joint tenants, you could make a declaration (known as severing the tenancy) to convert your ownership into tenants in common.
If the ownership is by way of tenants in common you could transfer to beneficial joint tenants (so long as all the owners agree) by making a Declaration of Trust.
Examples of how the different methods can affect you can include:
If a couple separate, one may decide to sever the joint tenancy so as to protect their share of the property and ensure it passes under the terms of their will, rather than automatically to the other joint owner.
Fred and Freda have been married for 20 years, have three children and own their home as Joint Tenants. However, they decide to divorce and neither remembers to sever the joint tenancy.
Immediately after the divorce, Freda marries Jack and makes a will leaving everything to him. Fred dies at the age of 90 and Freda dies 2 months later. The family house passes to Jack and the children receive nothing.
A married couple may choose to hold the property as tenants in common for various reasons:
Tax – you don’t have to own equal shares in your property, and there may be tax advantages in holding the property in unequal shares.
Janet, a company director, pays 45% tax. John is a full-time house-husband with no income from employment. They own a second home which they rent out at £1,000 per month. Whilst they own this house as beneficial joint tenants, they are each entitled to half of any rental income. John pays 20% tax on his share (£100 per month), but Janet has to pay 45% on hers (£225 per month).
They decide to sever the tenancy, with Janet making a gift to John of most of her share of the house, leaving her with a 10% share. Now, John receives 90% of the income, on which he pays £180 per month in tax, and Janet receives 10% of the income, paying £45 per month in tax. As a couple, they now save £100 per month.
Securing the children’s inheritance - this can be threatened either by care home fees, or perhaps by the remarriage of a surviving partner who is not the parent of the children. If the home is owned as tenants in common, each partner can make a will which leaves their half share in trust on whatever terms they wish.
Mick and Joan own their home as tenants in common. Theirs is a second marriage, and each has children from their first marriage. They want to make sure that their own children get their share of the house. They have made wills which, in the event of the death of one of them, leaves their share of the house in trust for their children, but with a right for the surviving spouse to live in the house for the rest of their life.
Another example might be……
Donald and Edith were childhood sweethearts. In their 80s, married for 60 years and with 2 children, they decided to make wills in which each left their half of the house in trust for the children, with the right for the other to live in it as long as they wish. When Donald sadly dies, Edith moves into a nursing home. Donald’s half of the house then passes to the children, because Edith is no longer living there. Edith's half of the house now pays for her care, but the children have the other half of the value of the house.
If you would like further advice on any aspect of this article, please do call me to arrange an appointment.