Joint asset ownership (e.g. in a property) is an important issue for inheritance tax (IHT) and estate planning purposes. The destination of a joint owner’s interest in the property potentially affects the IHT liability in respect of it.
A property can be owned either as ‘joint tenants’ or as ‘tenants in common’ (nb this article applies to property ownership in England and Wales; different rules apply in Scotland (see IHTM15091)). If a property is bought equally it will be held as joint tenants, unless the owners direct otherwise.
What type of ownership?
If a property is owned as ‘joint tenants’, it is not possible for an owner to pass on ownership of the property on death (or during lifetime) to third parties. The property passes automatically on their death by survivorship to the remaining owner(s) (and if more than one owner, in equal shares), irrespective of the terms of the deceased’s will or the rules of intestacy.
By contrast, ownership as ‘tenants in common’ gives each owner a separate share of the property, which can be left by the joint owner’s will to third parties (or under the rules of intestacy, if there is no will) or disposed of during lifetime.
General guidance on joint property ownership is available on the UK Government’s website (www.gov.uk/joint-property-ownership).
Severing a joint tenancy
As indicated above, the default ownership position is a joint tenancy. However, the flexibility offered by ownership as ‘tenants in common’ means that it is not uncommon for joint owners (e.g. husband and wife) to change (or ‘sever’) their joint tenancy in favour of a tenancy in common. An equitable joint tenancy can be severed by a joint tenant (e.g. husband) giving the other joint tenant(s) (e.g. wife) a notice in writing.
The Law of Property Act 1925, s 36(2) provides that “…where a legal estate (not being settled land) is vested in joint tenants beneficially, and any tenant desires to sever the joint tenancy in equity, he shall give to the other joint tenants a notice in writing of such desire or do such other acts or things as would, in the case of personal estate, have been effectual to sever the tenancy in equity, and thereupon the land shall be held in trust on terms which would have been requisite for giving effect to the beneficial interests if there had been an actual severance.”
The following example involving a written notice of severance of a joint tenancy is adapted from ‘Converting to a Tenancy in Common’ (UK Land Registry Services – England and Wales) (www.landregistryservices.com/samples/england_and_wales/eng_notice_of_severance.pdf).
Example: Notice of severance of joint tenancy – husband and wife
To: Jane Smith, 29 Acacia Avenue, Anytown AN1 5ZZ
29 Acacia Avenue, Anytown AN1 5ZZ
Title number: NGF123456789 (Freehold)
I HEREBY GIVE YOU NOTICE severing our beneficial joint tenancy of and in 29 Acacia Avenue, Anytown AN1 5ZZ now held by you and me as joint tenants both at law and in equity and henceforth the property shall be held by us as tenants in common in the shares appearing below AND I REQUEST you to acknowledge receipt of this Notice by returning the duplicate Notice enclosed herewith.
50% John Smith
50% Jane Smith
29 Acacia Avenue, Anytown AN1 5ZZ
I hereby acknowledge receipt of this Notice of Severance of which the above is a duplicate.
The notice of severance must be given during lifetime, as a joint tenancy cannot be severed by will. However, HM Revenue and Customs (HMRC) appear to accept that a joint tenancy can be treated as having been severed by will for IHT purposes by a deed of variation (under IHTA 1984, s 142) (see IHTM35092).
Where’s the proof?
If the written notice of severance is mislaid, it may be difficult to demonstrate that the joint tenancy has been severed – although not impossible.
In Chadda & Ors v Revenue & Customs  UKFTT 1061 (TC), the wills of a married couple (Mr and Mrs T) each provided for a trust, with a view to utilising the IHT nil rate band of the first spouse to die. Mr T died in September 2003. Following Mr T’s death, the trustees of his nil rate band trust agreed to transfer the trust’s purported share of the matrimonial home into Mrs T’s sole name, in return for her estate owing the trustees the value of that share (i.e. an ‘IOU arrangement’). This was on the basis that Mr and Mrs T’s joint tenancy of the house had been severed shortly before Mr T’s death, and that his interest in the house passed to the trustees on death in accordance with the terms of his will, thereby utilising Mr T’s nil rate band.
Mrs T died in July 2007. Following her death, HMRC disputed that the joint tenancy of the house had been severed. The First-tier Tribunal had to consider whether the evidence supported the appellants’ contention that the joint tenancy was severed. If it did, Mr T’s nil rate band would have been used partly by his share of the house becoming subject to the nil rate band trust, with Mrs T continuing to live in the house by means of the IOU arrangement. If the appellants were unable to establish that the joint tenancy was severed, Mr T’s interest in the house would have passed by survivorship to Mrs T, resulting in part of Mr T’s nil rate band being unused.
Prior to his death, Mr T’s professional advisers had prepared a notice severing the joint tenancy of the matrimonial home. However, there was a dispute between HMRC and the advisers about whether the notice of severance had been signed by Mr and Mrs T, as a signed notice could not be found. The tribunal found on the balance of probabilities that Mr and Mrs T had both signed the notice of severance in August 2003; that the original document was lost by their advisers; and that the unsigned draft notice submitted as evidence was in the same form as the signed notice which had been lost. The appellants’ appeal was allowed.
The tribunal in Chadda helpfully pointed out that a written notice of severance (under LPA 1925, s 36(2)) was only one of four possible bases of severance. The other three are: (1) an act of any one of the persons interested acting on their own share (following Williams v Hensman  70 ER 862); (2) mutual agreement; and (3) any course of dealing sufficient to intimate that the interests of all the joint tenants were mutually treated as constituting a tenancy in common (i.e. ‘mutual conduct’).
Notwithstanding that a signed notice of severance was held to exist in the above case, the tribunal still concluded that Mr and Mrs T demonstrated a mutual agreement to sever the joint tenancy, and also that the joint tenancy was severed by their mutual conduct. Nevertheless, it will generally be good practice to use a signed notice of severance, and to keep the signed notice in a safe place so that it can be produced later on, in order to demonstrate how the property was held between the joint owners.
The above article was first published by Tax Insider (January 2015) (www.taxinsider.co.uk).