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Any chance of a discount?

Shared from Tax Insider: Any chance of a discount?
By Mark McLaughlin, May 2021

Mark McLaughlin looks at discounts from the market value of jointly-owned properties for inheritance tax purposes. 

Land and buildings (e.g. the family home) are often held in joint names, such as by spouses (or civil partners), or parent and offspring. When it comes to valuing an interest in a jointly-owned property for inheritance tax (IHT) purposes (e.g. on death), it is necessary to consider the valuation methodology. 

Disposing of a joint interest 

As a general rule, the value of a property for IHT purposes is its ‘market value’ (i.e. the price which the property might reasonably be expected to fetch if sold on the open market at that time). HM Revenue and Customs (HMRC) normally instruct the Valuation Office Agency (VOA) to undertake valuations on its behalf. 

A jointly-owned house could be held either as ‘joint tenants’ or ‘tenants-in-common’ (different rules apply in Scotland). Joint tenants do not own a specific share of the house; when one co-owner dies, the survivor(s) automatically inherits the deceased’s interest. By contrast, tenants in common each own a specific share of the house value and can deal with their share independently. For example, on death, their share passes to whoever is entitled under the deceased’s will or intestacy (i.e. not necessarily the co-owner(s)). 

The default ownership position is a joint tenancy. However, it is generally possible to sever a joint tenancy in favour of a tenancy-in-common. A notice of severance must be given during lifetime (but see below).  

IHT saving? 

Disposals of joint property interests as tenants-in-common are possible during lifetime or by will. A tenant-in-common interest in the family home would entitle the co-owner to occupy the whole property. On the transfer of an interest by a tenant-in-common (e.g. an interest passing from father to adult daughter on death), father’s share could be eligible for a discount, generally of between 10-15%, although the actual level of discount will be subject to the Land Tribunal’s agreement based on the particular facts and circumstances (see the VOA’s IHT manual at paragraph 18.5).  

However, where the property is held jointly by spouses or civil partners, HMRC is likely to challenge any discount claimed on a joint property interest passing on the first death, under the special valuation rules for ‘related property’ (for example, see Price v HMRC [2010] UKFTT 474 (TC)).  

As indicated, a joint tenancy cannot be severed by will. Does that mean the opportunity to claim a discount has passed? Possibly not. 

Example: Too late - or is it? 

A married couple (David and Mary) jointly-own the matrimonial home as joint tenants. David dies first. His interest in the family home passes by survivorship to Mary. Sadly, Mary dies 15 months later, owning the whole house (worth £750,000), which is left to their only daughter Leah. Has the chance to claim a discount been missed for IHT purposes? 

Not necessarily. Leah could, within two years of her father’s death, vary the devolution of his estate so that the joint tenancy is treated as severed for IHT purposes (see below) and his 50% share (worth £375,000) passes to Leah. The other 50% share inherited from her mother may be subject to a co-ownership discount.  

Practical tip

HMRC seemingly accept that a joint tenancy can be treated as having been severed by will for IHT purposes by a deed of variation (see HMRC’s Inheritance Tax manual at IHTM35092). 

Mark McLaughlin looks at discounts from the market value of jointly-owned properties for inheritance tax purposes. 

Land and buildings (e.g. the family home) are often held in joint names, such as by spouses (or civil partners), or parent and offspring. When it comes to valuing an interest in a jointly-owned property for inheritance tax (IHT) purposes (e.g. on death), it is necessary to consider the valuation methodology. 

Disposing of a joint interest 

As a general rule, the value of a property for IHT purposes is its ‘market value’ (i.e. the price which the property might reasonably be expected to fetch if sold on the open market at that time). HM Revenue and Customs (HMRC) normally instruct the Valuation Office Agency (VOA) to undertake valuations on its behalf. 

A jointly-owned house could be held either as ;

... Shared from Tax Insider: Any chance of a discount?
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