Inheritance tax is charged at 40% on the assets of a person who has died (as well as at 20% on certain transfers during their lifetime). The amount of inheritance tax depends on the value of the deceased’s assets, less any debts, including any mortgages. However, inheritance tax is not normally payable if the value of the deceased’s assets is below £325,000 (otherwise known as the “nil rate band”).
Do you pay inheritance tax on inherited property?
There are inheritance tax exemptions for married couples and those in civil partnerships. Assets left to the spouse or civil partner, provided they’re living in the UK, are exempt from inheritance tax and if the assets are worth less than the nil rate band, any unused amount can be added to the spouse’s nil rate band to minimise the inheritance tax payable when they die. A married couple can therefore, collectively leave assets worth up to £1 million free from inheritance tax. These rules do not apply to unmarried or cohabiting couples.
Do you have to pay inheritance tax on jointly owned property?
For inheritance tax on unmarried couples, the liability to pay inheritance tax on assets owned jointly with another person to whom you are not married or in a civil partnership will depend on whether you and your co-owner own the property as “joint tenants” or “tenants in common”, and whether there’s a will.
What is “jointly owned”?
If you and the deceased jointly owned an undivided share of the assets, you were ‘joint tenants’. However, if you each owned a defined share of the assets, you were ‘tenants in common’. “Defined share” means whatever percentage of share had been agreed between the co-owners, such as 50/50 or 1%/99%, for example.
Joint tenants and inheritance tax.
If you were joint tenants you will automatically inherit anything you owned as ‘joint tenants’ and you may have to pay Inheritance tax if the whole of the deceased’s assets are worth more than the inheritance tax threshold of £325,000 and the deceased’s estate does not pay.
Tenants in common
If you owned a property as tenants in common and the deceased left you their share you may have to pay inheritance tax on the deceased’s share of the property if the whole of their assets is worth more than the inheritance tax threshold of £325,000 and the estate does not pay the tax.
Wills and inheritance tax
If the deceased left you their share of the property in their will, the executor of the will or administrator of their estate should pay the inheritance tax out of the estate. However, if the estate does not have enough money to pay the inheritance tax on the deceased’s share of the assets, or the executor does not pay, you will be required to pay the inheritance tax, and you may have to sell the property to pay the inheritance tax owed.
Do you pay inheritance tax if a company owns the property?
There are two points here. First, the value of the shares in an investment company that does not qualify for business property relief (because the company does not carry on an active business or trade) will be liable to inheritance tax when the shares pass on the death of the owner (and also on certain lifetime transfers). However, the properties owned in the company will not be liable to stamp duty, capital gains tax or inheritance tax when the shares in the company are inherited.
The second point is that with a “close company” (i.e., a company controlled by five or fewer participators) the inheritance tax rules pierce the corporate veil and attribute to the participators in a close company a transfer of value made by the company and treat alterations in capital or rights as a disposition made by the participators. This means that inheritance tax can be charged on transfers of assets by close companies.
Is anyone exempt from paying inheritance tax on property?
Yes, there are various exemptions and reliefs from inheritance tax, including gifts to a surviving spouse, gifts to UK charities, gifts made at least seven years before your death and transfers that qualify for business and agricultural property relief.
Who pays inheritance tax on jointly owned property?
If you owned property as ‘joint tenants, ’ the deceased’s share in the property will pass to you outside the will but you may have to pay Inheritance tax if the whole of the deceased’s assets are worth more than the inheritance tax threshold of £325,000 and the deceased’s estate does not pay. If you owned the property as tenants in common and the deceased left their share to you, you may have to pay inheritance tax on the deceased’s share of the property if the whole of their assets is worth more than the inheritance tax threshold of £325,000 and the estate does not pay it.
Capital gains tax on jointly owned inherited property
The CGT base cost of inherited property is uplifted to its market value at the date of the deceased’s death which is very helpful for the person who inherits the property. However, future increases in the property’s value will potentially be liable to CGT if the property is subsequently sold. There are two ways to avoid the eventual capital gains tax on an inherited property and these are:
- Make the inherited property your principal residence, or
- Sell or gift the property as soon as it is inherited
Inheritance tax on the jointly owned property is not always straightforward, and whether or not inheritance tax has to be paid will depend on several factors, including the status of the person inheriting and their relationship with the deceased, how the property was jointly owned, the type of the property concerned, whether any possible inheritance tax exemptions can apply to the property, the timing of any lifetime transfers and whether the deceased’s estate has paid the inheritance tax due or not.
Patrick Cannon can advise you about a jointly owned property and the tax consequences of joint ownership including for inheritance tax, capital gains tax, stamp duty and VAT.