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Home Ownership – The Hidden Cost of a Tenancy in Common
A proposed change to the way in which probate fees are calculated will mean that many couples who have made Wills with trust provisions in recent years will now need to review the way in which they own their home.
Where people own property jointly (e.g. husbands and wives) they can choose to do so in one of two ways. If they hold as "joint tenants" and one of the joint owners dies, their share automatically passes to the surviving joint owner or joint owners and it does not pass under the Will of the deceased. If they hold as "tenants in common", however, each of the joint owners can leave their share to whoever they choose and it will pass under their Will.
Originally, it was common for spouses to hold the family home as joint tenants as the expectation would be that they would each want to leave their share to each other. As property prices increased in the 1980s and 1990s and more and more families became subject to inheritance tax, however, many spouses made Wills containing trust provisions for tax planning reasons and changed the ownership of the house from a joint tenancy to a tenancy in common as part of the arrangement.
Such Will trusts were designed to ensure that the first spouse to die would not waste their inheritance tax allowance but the rules changed in October 2007, since when it has been possible to transfer inheritance tax allowances between spouses. This means that the tax planning reason why many spouses included trust provisions in their Wills is no longer relevant.
There are still other potential advantages and disadvantages of trust arrangements in Wills and if you have such a Will you should take proper advice before changing it. The change in the tax rules in 2007 did prompt many spouses to review their Wills and to revert to more straightforward Wills simply leaving everything to each other. Often, however, they will not have considered the way in which they hold the house and this is about to become more important.
It has recently been announced that as from an (as yet unspecified) date in May 2017 the way in which the fees that are payable to the Probate Registry on an application for a Grant of Probate are calculated will change. At present, there is a flat fee of ¬£155 regardless of the value of the estate. Under the new system, the fee will be calculated by reference to the value of the estate passing under the Grant. For the largest estates, this will result in an increase in the fee from ¬£155 to ¬£20,000 and even for an estate of just over ¬£300,000 the fee will increase more than six fold.
The relevance of home ownership here is that if spouses or civil partners hold the house as joint tenants, the share of the first to die will pass automatically to the survivor without passing under the Will of the deceased and the value of the deceased's share should therefore not be taken into consideration in calculating the probate fees. If they hold as tenants in common, the share of the first to die will pass under their Will and even if it passes to their spouse or civil partner it will be taken into consideration in calculating the probate fees. If you intend to leave your share of your home to your spouse or civil partner, therefore, holding the property as joint tenants rather than tenants in common could save many thousands of pounds.
At the time of writing, a parliamentary committee has questioned whether the Lord Chancellor has the legal power to change probate fees in the way intended, on the basis that the effect is to change an administrative fee into a tax and force executors to subsidise parts of the court system they will never use. The Lord Chancellor's Department, however, says that it intends to press ahead with the changes as quickly as possible after Easter.
My message is therefore two fold. First, if you have a Will containing trust provisions, now is a good time to review whether those provisions remain relevant. Secondly, if you own a property as tenants in common but intend to leave your share to the other joint owner if they survive you, you may want to consider whether you should convert to a joint tenancy.
More generally, this is a good example of the need to review Wills and your affairs regularly as changes in the law and the tax rules can mean that Wills and legal arrangements that are appropriate when they are made may not be appropriate further down the line.
To review your Will and the surrounding arrangements please contact Mark Jones on 01423 502211 or firstname.lastname@example.org