More and more unmarried couples are now buying a property together and choosing to own that property as ‘tenants in common’. There are advantages to this, but it is accompanied by a very real concern for the owners when they start to think about their future. The problem is often highlighted when the couple comes to consider their Wills and centres around how the partner who dies first (A) can ensure that the survivor of the couple (B) will be guaranteed the right to remain in the property for as long as he wishes.
This article attempts to illustrate how and why the problem arises and, more importantly, the ways in which it can be circumvented.
A couple can own their property as either ‘joint tenants’ or ‘tenants in common’. If they own as ‘joint tenants’, the problem of occupation does not arise. This is because on A’s death B acquires A’s interest automatically by operation of the right of survivorship. It is not necessary for A to specify this in his Will.
If a couple owns a property as ‘tenants in common’, each owns a distinct and quantifiable share. More often than not, each will hold an equal half-share. This is an advantage for independently–minded individuals who prefer the freedom of owning their own share. An owner can then specify in his Will exactly how he wishes to dispose of that share after his death.
The disadvantage of that freedom is the concern of occupation. There are a number of possible solutions to the problem and these are set out and analysed below:
1. A gives his share to B in his Will
This may seem the obvious way for A to guarantee that B will be able to occupy the property. There are two problems with this simple solution.
Firstly, the value of A’s share is transferred into B’s estate. Therefore, if inheritance tax were payable on A’s share upon A’s death, it may also be payable on that share upon B’s death. This needless benevolence to the taxman could be very costly, depending on the value of the property. It is worth pointing out, however, that if the couple were married, inheritance tax would not be payable twice, by virtue of the spouse exemption on the first death.
Secondly, it may be that A merely wants to be sure that B will be secure in the property for as long as B wishes, rather than actually give the share to B. After all, if the latter had been A’s intention, it would probably not have been decided to own the property as ‘tenants in common’ in the first place.
2. A specifies in his Will that B may occupy
It is possible for A to confer an express right of occupation to B in his Will. Typically, this allows B to use and enjoy the property as his principal residence for as long as B wishes or until his death. On B’s death, A’s share of the property will fall back into A’s estate and can then be distributed as directed in A’s Will.
Certainly, this will achieve A’s wishes, but he will not be pleased to learn that the taxman will also gain from this further act of benevolence. The Inland Revenue considers that express rights of occupation amount to B having an actual interest in A’s share and thus the value of the share will form part of both A and B’s estates for inheritance tax purposes.
Therefore, the challenge for A is how to confer rights of occupation to B without transferring the value of his share into B’s estate and causing the taxman to benefit twice from the same share of the property. The following solutions suggest this may be possible.
3. A relies on the law
Both A and B hold the property as ‘tenants in common’ and as such hold it in trust for each other. This trust continues even after the death of A, where B continues to be a beneficiary. If the purposes of the trust include making the land available for a beneficiary of the trust, that beneficiary has a right to occupy the land at any time. This right is conferred by section 12 of the Trusts of Land and Appointment of Trustees Act (TLATA) 1996. In this instance, B should have no difficulty showing that his occupation was a purpose of the trust.
It is as yet untested in the courts whether or not this entitlement will successfully allow B to remain in the property. Nor has it been tested whether it would avoid inheritance tax being payable twice on A’s share of the property. However, specialists in this field consider that tax avoidance may be possible in this way and that the solution may be to not mention the issue of occupation in A’s Will.
Nonetheless, although it may appear to be a solution, it is not without its risks or problems.
Firstly, the absence of a test case is likely to be off-putting to couples despite the potential financial gains.
Secondly, reliance on the legislation could lead to difficulties for B. This would be because A’s Will does not mention the property and, on the face of the Will, it would form part of A’s residuary estate. Any residuary beneficiaries could therefore put pressure on B to sell the property, especially if B owned less than a fifty per cent proportion. They could also attempt to exercise their rights of occupation under section 12.
4. A creates a discretionary trust in his Will
In some circumstances, there may be scope for using A’s Will to place A’s share in a discretionary trust. However, this is a complex and technical area, which requires specialist advice.
Of course, there are other possibilities. As mentioned, marriage avoids the risk of inheritance tax being payable twice, but does not necessarily solve the problem of how to guarantee occupation for B. Conversely, owning the property as ‘joint tenants’ guarantees B’s security in the property, but does not negate the risk of a double charge to inheritance tax for unmarried couples. Being married and owning as ‘joint tenants’ solve both problems, but are life choices which a couple is unlikely to be willing to be forced into by law.
Hence, the conclusion to this rather vexing problem for couples is that none of the proposed solutions is without its pitfalls. There are uncertainties and risks along the way, set against the gloomy landscape of inheritance tax liability. This uncertainty seems the complete opposite of what the couple wants to achieve. Perhaps the real solution is to identify whether the couple’s true objective is peace of mind or the avoidance of tax. If the former, as is likely, option 2 may be the most preferable.
DISCLAIMER: The content of this article is for general information and guidance purposes only and is not in any way intended to form a definitive solution to the issues raised. Readers should be aware that individual circumstances vary and that legal advice and solutions vary accordingly. Therefore, specific advice should be sought in individual cases. Neither the author nor Stafford Young Jones can accept liability for any loss damage expenses claim or action resulting from reliance on this article.
