When a property is inherited, questions often arise about whose name should be on the legal deeds and how this affects inheritance tax (IHT).
IHT is levied at 40% above thresholds, which start at £325,000 per person. This threshold rises to £500,000 if a home is left to direct descendants. For surviving spouses or civil partners, the thresholds double to £650,000, or £1 million if a property is left to children, grandchildren, or their descendants.
Understanding Property Ownership
A key distinction in property ownership is between 'tenants in common' and 'joint tenants.' When owners are tenants in common, they can divide their property into specific shares, which can then be left to beneficiaries in a will. In contrast, when owners are joint tenants, the surviving owner automatically inherits the entire property, regardless of what a will states.
If parents owned a property as tenants in common, a restriction is typically placed on the title, preventing a sale by only one owner. This restriction would remain even after one owner's death, protecting the deceased's share. If the property was owned as joint tenants and no such restriction exists, the inheritance specified in a will might not be effective, with the share passing directly to the surviving joint tenant.
It is possible to switch from joint tenancy to tenants in common even after one partner has died. This allows for the deceased's share to be passed according to their will or intestacy rules.
Inheritance Tax Implications
Inheritance tax is calculated on the beneficial interest in an asset, not solely on the legal ownership. Therefore, even if an individual's name is not on the legal title, they still hold a beneficial interest in the property. This means the IHT liability on the surviving owner's death will be based on the share of the property they beneficially own.
Legal Title and Protection
Regardless of IHT considerations, it is considered best practice for legal title to reflect the underlying beneficial interests. This can be achieved by adding the inheritor's name to the legal title, making them a joint legal owner. This provides protection, as the surviving owner cannot deal with the property—such as selling or remortgaging—without the consent of the joint owner.
Alternatively, a restriction can be placed on the title to notify third parties, like potential buyers or lenders, that a beneficial interest exists. Such restrictions can offer varying degrees of control, from requiring notification of changes to demanding explicit consent for transactions.