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Take advantage of your IHT allowance
By Peter Harrap
Holding property as 'tenants in common' means that you and your spouse (this applies equally to civil partners) independently own a share of the property, and as such you can leave your share to whomever you want. If you own the property jointly (as joint tenants), on the first death ownership automatically goes to the surviving spouse or civil partner.
Therefore, as a 'tenant in common' you could leave your interest in the property to someone other than your spouse (or vice versa) to take advantage of your nil-rate band for IHT purposes, currently £285,000 for 2006/07. However, great care must be taken not to give the survivor 'a right to total occupancy' as this creates a settlement, and would negate the IHT advantages. When the surviving spouse dies, a further nil-rate band would be available.
It is certainly advantageous to use both the IHT nil-rate bands available to you. However, remember that the nil-rate band available for an individual is reduced by the value of any gifts of assets (classed as potentially exempt transfers) made by that individual during the seven years prior to death. Of course, if the value of your individual interest in the property exceeds the nil-rate band the excess will attract tax at 40% on your death.
Consider the children?
It is also important to carefully consider how the surviving spouse will feel about having a large portion of the house owned by the children. There could also be further implications in your children holding such an asset. For example, should a child subsequently divorce, the value of his or her interest in the property will be taken into account in the divorce and maintenance settlement (possibly causing family pressure to realise that value through a sale).
An alternative would be to create nil-rate band discretionary trusts in your wills. The surviving spouse could be one of the beneficiaries of the trust along with your children, but the trustees would control the interest in the property and its capital value would remain outside the survivor's estate.
Changing the legal ownership of the property recorded at the Land Registry is a task that your solicitor should be able to deal with. There should not be any Stamp Duty Land Tax issues.
Peter Harrap, tax partner at accountants and business advisers PKF, East Anglia
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