Mark McLaughlin looks at the prospects of an inheritance tax discount being obtained for jointly held property.
Two (or possibly more) individuals might together buy (say) a house. If one of those individuals disposes of their interest in the house to a third-party or dies, how should that property interest be valued for inheritance tax (IHT) purposes?
The 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 person’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)). Most valuation issues arise where land is held as tenants in common. In this article, it is assumed that the property is owned as joint tenants in common, and one of the co-owners dies.
HM Revenue and Customs (HMRC) consider land and property valuation to be an area of ‘high risk’ of a potential loss of IHT. A factor in valuing the house in our example on the death of a co-owner is the extent of any discount from the market value of the deceased’s interest.
The valuation office agency (VOA) assists HMRC by valuing property for tax purposes. The VOA has published an Inheritance Tax manual, which explains its approach to valuations for IHT purposes (see www.gov.uk/guidance/inheritance-tax-manual).
The VOA’s guidance states that the level of discounts to be applied when valuing an ‘undivided half share’ (i.e. 50% ownership as a joint tenant in common) should normally be as follows:
- ‘where the other co-owner(s) is (are) not in occupation and the purpose behind the trust no longer exists - 10%
- where the other co-owner(s) is (are) not in occupation but they have a clear right to occupy as their main residence and the purpose behind the trust still exists - 15%
- where the other co-owner(s) is (are) in occupation as their main residence - 15%’
- ‘Trust’ in this context refers to a trust of land. Broadly, where the legal estate of land is held in joint names, the legal joint tenancy is indivisible and is vested in trustees (note - different rules apply in Scotland).
Related property
However, special valuation rules (‘related property’) can apply to property owned jointly by spouses (or civil partners). Related property is broadly property in the spouse’s estate (or property that was the subject of certain exempt transfers within the previous five years, e.g. to charity).
The rules apply (to lifetime transfers or on death) where the value of property comprised in the person’s estate would be less than the appropriate portion of the aggregate value of that property and any related property; the value is the ‘appropriate portion’ of that aggregate (IHTA 1984, s 161).
