No one can deny the complexities of inheritance tax. Luckily, there is no need for you to deal with all by yourself. This guide is here to help you figure out how much tax applies to assets in the tragic event of your passing. We figured you could use a detailed yet simplified version. Once we cover this, we can explain who pays Inheritance Tax (IHT) on jointly owned property.
First, let’s discuss the definition of inheritance tax.
What is Inheritance Tax?
If a person passes away, then 40% inheritance tax is applicable to their assets. Also, 20% applies to specific transfers during their lifetime. Here are the factors the amount of inheritance tax depends on:
The value of the assets of the deceased, including mortgages and excluding debts, determines the amount of inheritance tax. Although you don’t owe inheritance tax if the value of your assets is below £325,000. This is the nil rate band.
Who Does not Pay Inheritance Tax on Inherited Property?
Certain exemptions exist in the case of civil partnerships and married couples. Of course, there are criteria for them.
They must reside in the UK and their assets should fall below the nil rate band. Furthermore, they can add any amount not used to their spouse’s nil rate band. This minimises the inheritance tax payable in case of their death.
The good news for a married couple is that they can leave assets worth £1 million free from inheritance tax. Unfortunately, there are no such rules for cohabiting and unmarried couples. Then, who pays inheritance tax on jointly owned property?
What is the Definition of Jointly Owned?
Let’s discuss the meaning of jointly owned. Well, there are two ways you can jointly own property with someone. You are joint tenants with anyone you own an undivided share of assets with. The other way is if you each of you own a defined share of the assets. This means you are tenants in common.
Now, what is a defined share? It is the percentage of share that is agreed upon by the co-owners of the property. For example, 50%/50%, or 30%/70%.
If you are a Joint Tenant
In the scenario that you are joint tenants, and one owner passes away, the other inherits anything they owned. If the deceased’s assets are worth more than the threshold of £325,000, then you must pay inheritance tax. This applies when the estate does not pay tax.
In Case you are a Tenant in Common
Under this circumstance, you pay inheritance tax if the deceased leaves you their share. You pay inheritance tax on their share of the property only if the value exceeds the threshold of £325,000. Again, this is when the estate does not pay tax.
Thus, you need to understand how to pay inheritance tax on jointly owned property.
What Happens If a Company Owns the Property?
When a company owns a property, there are two main points. First, let’s discuss the value of the shares that do not qualify for business property relief. These are shares of an investment company. They do not qualify because the company is not partaking in an active business or trade. When the owner of the share passes away, the inherited shares become liable to inheritance tax. This applies to specific lifetime transfers as well. Yet, there is no Stamp Duty Land Tax (SDLT) or Capital Gains Tax (CGT) charges on the company’s properties when shares are inherited.
Moving on to the second point. This is for a “close company”. A close company is when there are five or fewer participators in control. There are certain rules regarding paying inheritance tax. If the company makes a transfer of value, then inheritance tax can apply. This happens when a transfer of value takes place, and they treat alterations as disposition by the participators. Therefore, in the case of a close company, inheritance tax applies when there is a transfer of assets.
Furthermore, you need to comprehend who pays Inheritance Tax on jointly owned property.
Are There Any Exemptions from Inheritance Tax on Property?
The good news is that there are various reliefs and exemptions from inheritance tax in the UK. These include gifts to UK charities, gifts made at least seven years before passing, and gifts for a surviving spouse. Additionally, there is also relief for business and agriculture property.
Who Needs to Pay Inheritance Tax on Jointly Owned Property?
Now, to answer the most important question: who pays inheritance tax on a jointly owned property? Well, that depends on your situation.
For example, if you own a property as a joint tenant, then you will inherit the share of the deceased. This is outside of the will. What this means is that you may end up paying inheritance tax on that share. There are conditions, obviously. One condition is that the value of the deceased’s assets exceeds the threshold of £325,000. The other is that deceased’s estate does not pay.
Another scenario is if you own a property as a tenant in common. In this case if the deceased leaves their share to you in their will, you owe inheritance tax. Again, conditions apply. If the worth of the deceased’s assets is above the threshold of £325,000 and the estate does not pay, then you owe the inheritance tax. This clarifies how to pay inheritance tax on jointly owned property.
Can You Avoid Capital Gains Tax on an Inherited Property?
The simple answer is that yes, there are ways to avoid CGT on an inherited property. There is also an extensive answer. On the date of the deceased’s death, the base cost of CGT is raised to its market value. This is beneficial for the person who inherits the property in question. Nevertheless, in the future, an increase in the property value will lead to CGT, when the property is sold.
Now, let’s talk about the ways you can avoid paying CGT on an inherited property: There are two:
- You can make the property you inherit your primary residence.
- Or you can sell or gift the property the moment you inherit it.
What Tax Implications Exist When You are a Joint Owner of a Property?
When you decide to own a property with another person or person, then you each own an equal share of the property. This is for the purpose of tax implications. Most probably, you will end up paying income tax on any rental income that comes your way from the property. Also, you may need to pay Capital Gains Tax (CGT) when you decide to sell the property to make a profit.
How Does Capital Gains Tax (CGT) Apply If You Sell a Jointly Owned property?
Please note down the following:
If you sell a jointly owned property, you may end up paying Capital Gains Tax (CGT). This applies to your share of the profit. How to calculate gain? Well, first you must subtract the cost of the property from the sale price. You should also subtract any expenses that relate to the selling or buying of the property. Then, the joint owners receive their share of the gain according to their share of ownership of the property.
Can You Benefit from Stamp Duty Land Tax (SDLT) Exemption on Jointly Owned Properties?
Unfortunately, there is bad news for you. You do not qualify for any specific Stamp Duty Land Tax (SDLT) exemption as a joint owner of a property. However, there are some reductions on Stamp Duty Land Tax (SDLT). For example, you can reduce the Stamp Duty Land Tax (SDLT) you owe if you are a first-time buyer. Another option is if the value of your property is less than the threshold of stamp duty. That is, if you can meet the limits.
How Do Expenses and Rental Income Apply to Joint Owners of a Property?
Generally, as a joint owner of a property, you must pay for expense and rental income according to your ownership share. However, you and your partner in ownership can agree to pay in a different way.
Can You File a Joint Tax Return as a Joint Owner in the UK?
The short answer is no. While the long answer is that you cannot file a joint tax return with your partner or spouse. This is because each owner of the property must file their own tax return. They must declare their share of the Capital Gains Tax (CGT) and rental income. Therefore, it is important to understand how to pay inheritance tax on jointly owned property.
Can You Transfer Jointly Owned Properties without Tax Implications Arising?
In the UK, quite a few tax implications arise when transferring a jointly owned property to another person. For example, Stamp Duty Land Tax (SDLT) and Capital Gains Tax (CGT). If you wish to understand these tax implications, then it is ideal to reach out to a profession for advice. You can contact a specialist property accountant.
To summarise, inheritance tax on jointly owned property is not a straight line you can follow. There are plenty of considerations for you to ponder upon. Your scenario depends on your relationship to the deceased, the type of joint ownership, and the type of property. Not to mention the status of the person who receives the inheritance. Of course, there are exemptions as well. Additionally, there is also the concern about the timing of any lifetime transfer.
Therefore, one must fully comprehend the rules and regulations of inheritance tax in the UK. This way, they know if they qualify for exemptions.