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No one likes to think about the end, but sometimes it's important to look forward, especially if you own assets you would like to leave to your loved ones. One of the most important assets you might own is property, which is why deciding who your property belongs to after you die is an important decision. To make sure you’re able to pass on your property, you’ll need to select a beneficiary and make a will.
How you bequeath a property to your friends, partner, or children will depend upon how you own it. There are several different types of ownership and each will influence the way your will is written.
Outright ownership If you’re the sole owner of a property, you can simply name a new owner (or owners) in your will, and possession will pass over to them when you die.
Joint tenancy If you and someone else share ownership of the property on an equal basis, you’re likely to be ‘joint tenants’. When you die, the person you currently share ownership with will automatically inherit your share. That means your home is no longer yours to bequeath, but you can still make a request in your will.
Tenancy in common (TIC) If you own shares in your property with someone else, you are ‘tenants in common’. When you die, you can leave your share to someone else in your will. They will become the new tenant in common, along with any surviving shareholders.
If you live in Scotland, things work a little differently. In Scotland, there’s only one type of joint tenancy, which is called ‘joint ownership’. Like ‘tenants in common’, joint tenants own shares in their property, however the ownership structure is written on the title deed. This means owners should include a survivorship clause to say what happens when one person passes away.
If you're the outright owner of your house, or a tenant in common, you'll need to decide who you pass your home's ownership or share onto. This includes your actual residence, investment properties, land, or even a parking space you own.
When you pass on a property after you die, you’ll also pass on any outstanding debts against it. If there's an outstanding mortgage on your property, your heirs will need to make new arrangements with the mortgage lender to either repay the loan, or remortgage the home.
There's a number of ways you can divide your property. We call these legacies, but only a few apply to property:
How do these bequests work with your type of ownership?
These bequests can be factored in with your type of ownership to create a personalised will that is tailored to your wishes. If you’re an outright owner, you may want to leave your home to your partner so that they may continue to live there. However, you also want to secure your child’s inheritance...so what do you do?
Owners could decide to make a reversionary bequest, where a partner is made the property’s owner after your death, while their child is named benefactor for your partner’s death. That way, your partner has the right to continue living in the house until they die, but the child will inherit after.
Inheritance tax is a government tax on the total value of your possessions after you die. The cumulative value of your possessions is called your 'estate'. Your property only counts towards the value of your estate under certain conditions.
The usual tax rate is 40%. This means if you leave a home worth £550,000 to your child, they will have to pay inheritance tax on the portion of the property over £500,000. This is 40% of £50,000 in tax, equalling £20,000. It’s important to remember that you’ll have to pay inheritance tax on any assets of the estate worth over £500,000. For example if your child inherits the £550,000 property and other assets, such as stocks, they’ll have to pay inheritance tax on a lot more.
How do you avoid inheritance tax on property?
There are a number of ways you can reduce the amount of inheritance tax your beneficiaries have to pay. For example, if you give away legal ownership of your home before you die, move out and live for another 7 years, your beneficiaries won’t have to pay inheritance tax. This is even the case if you continue to live in the property, as long as you:
If you die after the 7 year deadline has passed, your beneficiaries won’t have to pay inheritance tax on your property. However if you pass away within 7 years of giving away legal ownership of your property, your home will be treated as a 'gift'.
Gifts, unfortunately, are subject to inheritance tax. If your property was gifted less than 3 years before your death, the receiver will have to pay inheritance tax at 40%. Property gifted between 3 and 7 years before your death, are taxed on a sliding scale known as ‘taper relief’. Taper relief is measured by the years between passing and the day the gift parted hands. Each period is affixed with a tax rate percentage.
As mentioned earlier, another way you can avoid inheritance tax is by bequeathing your property to your living partner. However, if you’d like to protect your children’s inheritance from taxation, you might decide to set up a property protection trust.
When you leave property to someone in a will, you want to make sure they receive it in its entirety. However, there are problems that could prevent your beneficiary from receiving the full amount of what you've left them. The most common type of property ownership in the UK is a joint tenancy - if you own your house jointly with your spouse, it will be automatically inherited by them upon your death. However, many couples choose to change from a joint tenancy ownership to a tenancy in common (TIC), so they can leave a percentage share to their children.
Why change from joint tenants to TIC?
The reasoning behind this change is simple. No one knows what can happen after they die. With a tenancy in common, you can guarantee that your share of property will pass to your children. As it's such a common procedure, the change from a joint tenancy to tenants in common is very easy to arrange.
Unfortunately, there's some awkwardness to this. If you leave your 50% share to your child, your surviving spouse will maintain a 'life interest', as the house can't be sold without their permission. While this may have no immediate impact on your family, there could be issues further down the line.
Care home fees
For example, issues might arise with a tenancy in common inheritance over the question of care home fees. In the event of your death, a 50% share in your property and its assets will go to your children as respective tenants in common.
If your joint tenant goes into care, the local authority will seek payments for care fees. They are able to target both your joint tenant’s and child's shares as potential assets, as your fellow tenant maintains a life interest in the property. This means their care home fees carry a chance of diminishing your child's inheritance.
So, what can you do to prevent this from happening? Well, if you've changed your joint tenancy ownership to tenants in common, you're on the right track. You just need to create a property protection trust.
Creating a property protection trust
A property protection trust is a sanctuary that is created posthumously in order to protect your child's share of their inheritance. Trusts are standard practice - they're set up through your will (as they don't become effective until death), and they won’t cost you anymore than a normal will.
With a trust in place and your joint tenant goes into care, local authorities will only be able to target the 50% share owned by them, while your child's share remains intact. This also means your property share will be exempt from capital gains tax if your child decides to sell it.
Capital gains tax is a taxation on goods you sell that have increased in value. If your property has increased in value since your death, and your child decides to sell it, they would have to pay this tax. With a trust however, there’s no capital gains tax liability on their share of the property, as a trustee may claim principal private residence relief because of the surviving tenant’s right to occupy.
Now you know the basics on how to leave your house in a will, all that's left is to write it up.
We highly recommend hiring a solicitor to seek legal advice for help calculating the ins and outs.
Consider working with an estate agent who has experience with probate valuations and sales. This will help you get an accurate valuation, which is important for determining the total value of your property and estate.
If you’re not ready to chat to a lawyer or estate agent yet, try out our free, online valuation tool, which uses the latest property market data, and information you input, to provide you with a quick estimate of how much your home is worth.
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