Severance of Home – Back to Basics
When you own land with another person, people talk about the ownership being in “joint names”, but in fact you will legally hold the property in one of two very distinct ways. The Conveyance Deed (unregistered land) or Transfer Deed (registered land) signed by you on original purchase will have defined how the property is held by you both. Most couples are often unclear as to which option they chose and the legal consequences of their choice. The two forms of joint ownership are either a Joint Tenancy or a Tenancy in Common.
You are classed as owning the property as Joint Tenants, with the property being held by you both effectively as one entity. As a result, if either of you die, there is a deemed transfer from the deceased to the survivor immediately before the death of the first to die and the survivor keeps the whole of the property. This result occurs under Land Law and means at the date of death of the first Joint Tenant, they do not legally own the property. Therefore, the Will of the deceased cannot direct what is to happen to the property nor can it make any express gifts in relation to the property. By contrast, the property will then belong solely to the survivor and will pass under the survivor’s Will when they later die. (Rather strange consequences can occur under this ancient land Law principal if both people die for example in a common motor car accident at the same time)
When this option of land ownership applies, you are classed as Tenants in Common and hold the property in separate shares (a little like a shareholder in a company). The shares can be equal or in differential amounts (e.g. 50/50 or for example 70/30 to reflect differing financial contributions). A Tenant in Common can deal separately with their share of the property: e.g. they can (in theory) sell or charge their separate share and (more importantly) they can gift it by will to whoever they choose. The concept of division is in relation to the sale proceeds itself, not a physical split of the property (i.e. one party cannot claim to own the “right hand side” of the house). It is important to have looked at this way of holding land if contributions to the purchase price are unequal (common in a purchase undertaken amongst business partners), or if one of you has anyone in particular (such as your children from another relationship) to whom you want to leave you share to within a Will.
The act of changing a Joint Tenancy to a Tenancy in Common is known as Severance. There are a number of occasions when it is essential that a property is held under a Tenancy in Common. These include:
- The wish to execute a Declaration of Trust to regulate the legal ownership of a property upon a day to day basis (for example a purchase of accommodation by two friends which needs to regulate financial contributions to overheads and the mechanics of a “forced sale” if one party wishes to bring the arrangement to a close)
- The break up of a relationship where parties have to “untangle” their financial arrangements and effectively “go their own way”
- The execution of a Will that wishes to preserve your interest in a property for the benefit of loved ones other than your spouse / partner. A common example is the parent in a second marriage who needs to ensure that certain assets will pass to their children from a previous relationship, not their current partner.
- The wish by both husband and wife to “ring fence” assets from the risk of care fees by setting up a Life Interest Will over the Family Home
The change can be done collectively by agreement of all owners (as part of an overall tax and financial planning strategy developed when organising your affairs with our Private Client Department) or can be undertaken unilaterally by one co-owner upon the other, without the other’s consent (an initial asset protection move undertaken at the outset of Divorce proceedings)
The Act of Severance requires a formal notice to be prepared. It is either signed by all owners (where the severance is being undertaken by agreement) or is signed and served by one party on the other (where the severance is a unilateral act by one owner against the other). The Severance Notice is required to then be recorded against the Conveyance Deed or more likely than not, formally registered against the Registered Title Number of the Property at HM Land Registry.
Upon completion of the legal formalities by Gregory Abrams Davidson Solicitors, the Property is then held by you as Tenants in Common. It is essential that this act of Severance is supported immediately by having an up to date and legally “water-tight” Will in place to then direct who is to inherit your share of the property upon death and under what terms and conditions.
To “confuse” matters, at no time will you see the Land Registry Certificate use the words “Joint Tenancy” or “Tenancy in Common”. Instead, once the notice of severance has been registered (or having initially obtained a copy of your Title Certificate, it is discovered that you already hold the property as Tenants in Common!), the following words will appear within “Section B: Proprietorship Register” of the Title Certificate:
“RESTRICTION: No disposition by a sole proprietor of the registered estate (except a trust corporation) under which capital money arises is to be registered unless authorised by an order of the court”
For most people, the primary wish when providing instructions for a Will is to ensure that loved ones receive their inheritance. Review of our Back to Basics - Standard Wills highlights some of the standard provisions inserted into many Wills written by Solicitors. However, whilst simplicity may appear to achieve the desired "result", a willingness to "think outside the box" may prove to be of far greater financial benefit to your family in the long run.
Couples traditionally wish to leave everything to each other upon first death, with ultimate and final distribution to the children upon the second death. The growing dilemma faced by the children is the consequences of the surviving parent entering nursing care and being required to fund their stay. Average costs amount to approximately £600 - £900 per week or £40-£60K per annum. The “inheritance" anticipated to pass to the children within the Will of the survivor is rapidly exhausted with the payment of care fees.
For a large proportion of our Clients, the family home, is by far the largest and most valuable asset of a person's financial Estate. It also offers a unique opportunity to "ring fence" an asset and protect it against attack from the Local Authority when assessing an individual’s financial contribution to care fees. The family home is the one asset that is both valuable and yet at same time offers little financial assistance to an individual upon a day to day basis (unless you are renting out rooms in your home and operating a guest house). The value tied up in the bricks and mortar only becomes realized, when the property is eventually sold by the children following both parents death. For the surviving parent, the reality in fact is that they require a roof over their head, not access to the equity within the property. The solution is to consider an alternative approach to the traditional gift between spouses upon first death. This is achieved through the use of a Life Interest created over the family home.
The foundation stone of this scheme is to initially review the legal ownership of the home to ascertain whether the property is held as a Joint Tenancy or a Tenancy in Common. The Back to basics - Severance of the Home information sheet explains the significance of this difference. If necessary, severance must take place during your lifetime to ensure each co-owner owns a 50% share of the property that they can "control" within the terms of their Will. Then, instead of following the traditional path of allowing this share to pass automatically to your surviving spouse/ partner, the deceased's share is immediately gifted to the ultimate beneficiaries who are proposed by you both to eventually inherit the home (traditionally the children). The outright gift to the children however is conditional upon an initial and immediate Life Interest that is granted to the surviving spouse for the remainder of their life. In essence, the children are legally required to “wait in the wings" for the surviving parent's death to actually benefit from the gift they have received.
For the purpose of any future financial assessment, only the survivors own 1/2 share of the home will be taken into consideration. Their Life Interest in the remaining half gifted to the children cannot impact upon their resources and therefore is effectively "ring fenced" and protected for the children. Obviously, this is a solution that doesn't address other assets of the survivor, but at least achieves a degree of certainty in ensuring a guaranteed sum will be protected for the next generation.
The Trust is designed to "catch" any home that you own at death. You can also set aside a contingency fund to cover running costs. It is suggested that special Property Trustees are appointed to administer this Trust. The Trustees are traditionally given power to advance capital or make a gift of the Trust property to your surviving spouse - though this power is discretionary. Therefore, with the consent of the Property Trustees, the arrangement could be closed and the property returned to the surviving spouse if this was required by them - though this obviously places the whole property at “risk" to care fees. Alternatively, the Trust can be transferred to another property if the surviving spouse wishes to relocate. All in all, great flexibility is achieved for the benefit of the surviving spouse, whilst securing a guaranteed financial inheritance for the children.
Three specific taxes need to be considered with this Trust arrangement:
Inheritance Tax - This scheme does not and is not designed to mitigate tax. The gift by the first to die (if between husband & wife) will attract Spouse Exemption and incur no tax liability. The technicalities of IHT means that the surviving spouse as Life Tenant is taxed on all their wealth, including their interest under the Trust. Accordingly, the final tax liability on second death is no different than had they inherited everything from the outset.
Capital Gains Tax - subject to the rules applicable to CGT being observed, the right of the survivor to occupy the Trust Property means that Private Residence Exemption will be available upon the survivor's death, providing the children with a "tax free" uplift.
Income Tax - whilst the Trust comprises only the family home, no income will be produced that would trigger a liability to tax. If the property is sold however and the survivor elects to instead receive an income from the sale proceeds (choosing not to reinvest in an alternative property) they will be taxed at either basic or higher rates (depending upon their personal tax status) or if a non tax payer, can reclaim any tax deducted at source on the investment portfolio comprised in the Trust.
Please review Back to Basics - Tax Planning Overview for a general consideration of lifetime and death tax planning opportunities.