Avoiding care costs with home switch

My husband and I own our home as ”joint tenants”. I understand that by changing this ownership status to ”tenants-in-common” we can each leave our half-share to our children when we die. The aim is to use up our inheritance tax allowances and avoid the possibility that the half-share would be used to cover care costs for the surviving spouse. How do we go about changing to tenants-in-common – do we need to use a solicitor or can we do the paperwork ourselves? I assume we will also need to update our wills.

Tim Gregory, partner in the private wealth group at accountants Saffery Champness, says that you can sort out this change in ownership status yourselves, with a letter to each other confirming that the property is now held on a tenants-in-common basis – and then ensuring that the change is registered at the Land Registry. However, it would be advisable to consult a solicitor to be sure that the process meets your requirements. And, in any case, you should use a lawyer to update your wills.

As you say, where jointly-owned property is held on a tenants-in- common basis, the share belonging to a deceased person goes to whoever it is left to in the will, and IHT applies in the usual way.

As a “joint tenant”, your share automatically passes to the other joint tenant(s) on your death. If the only other joint tenant is your spouse or civil partner, there will usually (ie assuming the recipient spouse is domiciled in the UK) be no IHT to pay, because of the 100 per cent spouse exemption. If there are no other substantial assets, then this could lead to the IHT nil-rate band of the deceased not being used at all and, until recently, that meant that it was wasted.

However, following a change in IHT rules, the unused proportion of the nil-rate band of a deceased partner can be transferred to the other on death. In many cases, this means that it no longer matters whether a property is held on a tenants-in-common or joint-tenant basis. However, there are other reasons to consider switching to a tenants-in-common status, including your suggestion that the ownership of the whole property may otherwise be taken into account in means-testing for care costs.

Second marriage no bar to benefit

I understand that when a surviving spouse dies, a double inheritance tax exemption is available where a previously deceased partner’s allowance was not used. My wife died in 1981 and I remarried in 1984. The second marriage was dissolved in 1988. Will my estate qualify for the double IHT exemption despite the second dissolved marriage?

Andrew Tailby-Faulkes, head of private wealth, employment and reward, at accountants Ernst & Young says the second marriage and its dissolution does not affect your ability to benefit from your deceased (first) wife’s allowance.

Since October 2007, it has been possible to transfer any unused inheritance tax (IHT) allowance from a deceased spouse (or civil partner) to the surviving spouse on their subsequent death. For civil partners, the first death must have occurred on or after 5 December 2005, but spouses can have died decades previously.

The effect is to increase the IHT threshold on the death of the second spouse or civil partner from £312,000 to as much as £624,000 (for 2008/09) if, on the death of the first spouse, the IHT nil-rate band was unused.

If on your first wife’s death, the whole of her estate was left to you and therefore covered by the spouse exemption, then your estate can benefit from double the nil-rate band applicable at the time of your death.

The individual nil-rate band is due to increase to £325,000 on 6 April 2009 and to £350,000 on 6 April 2010, meaning that the total exemption on the second death could grow higher over time.

If part of your first wife’s IHT threshold was used, then the amount that can be transferred is the percentage of the unused threshold applied to the IHT threshold at the time of your death. For example, the IHT threshold in 1981 when your wife died was £50,000. If 90 per cent of this was unused, then £280,800 (£312,000 x 90 per cent) would be transferable to you if you died in the current tax year. If the deceased made lifetime gifts that were not exempt from IHT in the seven years prior to her death, then the value of those gifts will also reduce the percentage available to transfer.

The unused IHT threshold can only be transferred from one spouse to the survivor when the marriage ends by death. As your second marriage ended by divorce/dissolution, there can be no transfer of unused nil-rate amounts between you and your second wife, even if she has subsequently died. To make use of any unused IHT threshold from your first wife, on your death the executors or personal representatives must generally send claim forms and supporting documents to HM Revenue & Customs within 24 months.