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Severance of Tenancy/Tenant in Common
Most couples own their properties jointly - but this can have pitfalls.
Problems can arise if one partner is running a business and gets into financial difficulty, or dies leaving debts. Creditors could force the sale of the house, even though the surviving spouse now owns the property outright and still lives there. This doesn't just affect married couples but any two people buying or owning a home together.
'When you buy a property your solicitor or licensed Conveyancer has to ask you how you want to hold the property but there are no rules on how they ask you. It could be as simple as ticking the first box on a form.' When most people buy a property they have other things on their minds and may choose joint tenancy almost by default.
This means that two people both own all the property. You can't sell one part separately and when one person dies the other becomes sole owner. With tenants in common each person owns a defined share of the asset.
Younger people clubbing together to afford a house should consider tenants in common. But even those in long-term relationships should look at this alternative.
A common reason is inheritance planning, particularly in the South, where property prices may push homeowners into the inheritance tax bracket. IHT is currently triggered once estates reach £325,000, and is payable at 40% on the excess. Transfers between husbands and wives are free of inheritance tax. But problems can arise on the death of the second spouse, when assets pass to children, who then may face a significant inheritance tax bill.
If a property is held as tenants in common, one half of the asset can be passed to the children on 'first death.'
Arranging the change from joint tenants to tenants in common is a relatively straightforward procedure. A notice of severance of joint tenancy is usually placed with the Land Registry and it does not involve any changes to the mortgage documents.
But it is important to get expert advice from us and ideally to look at such decisions as part of an overall inheritance strategy. 'There is very little point being tenants in common without having a properly drafted will in place.
Apart from anything else, if part of the property is going to pass to the next generation the right of the surviving spouse to remain in the home has to be preserved. In the case of creditors, they would still have a financial interest but could not force a sale and would have to wait for their money. The 'life tenants' still have the right to live in the house and even sell it and buy another one. The trust will protect a surviving spouse - or other life partner - from being forced into the premature sale of the home by creditors.
Placing the home in trust and changing to tenants in common could prove useful when considering the impact of care home fees. 'If a dependent is living in the house the local authority can't force a sale but they can place a charge on the property, this means that when the house is eventually sold, on the death of the survivor, the local authority gets its money, plus interest.
With tenants in common this charge could only extend to the portion of the house owned by the person in care. In the case of an interest in possession trust the whole home placed within the trust is preserved for the eventual beneficiaries.