SEVERANCE OF TENANCY

A Severance of Tenancy changes the way in which you own your property from joint ownership to Tenants in Common, so you can each leave your share of your property on your death to your chosen beneficiaries.   You can’t Sever your Tenancy if the house is in a sole name.   In this instance fifty per cent of the property could be transferred to your partner by our solicitors.

Community Care:

Severing can have positive effects with regards to the Community Care Act in ensuring at least half of your property passes to your children if, after your death your partner should go into care.

However, it could have a negative effect in the level of care given if your spouse is left with reduced assets and put into a state care home.

Consider:  

If you have a large estate which could be invested to produce enough income (say £30,000 PA) to pay for Nursing Home Fees without the Capital being eroded then the Community Care Act may not be a serious threat to your children’s inheritance?

Protection against Nursing Home Fees with Residential Rights:

Your half of the property passes on first death into Trust for the lifetime use of your spouse but for the ultimate benefit of your children.  A residential rights clause is normally included in your Will to allow the survivor to live in the property for as long as they wish.  It will also give the Trustees permission to sell the property and purchase another and invest any surplus capital for the benefit of the survivor.

Inheritance Tax Planning:

Severance of Tenancy has no Tax benefits if you give your spouse residential rights after your death. The Capital Taxes office has stated that even if no rights are granted they will consider each case individually, however in this years budget Gordon Brown has stated there will be clampdowns on Interest In Possession Trusts if the survivor continues to reside in the property.  We recommend an a discretionary trust with clauses which allow the survivor to give a promissory note to the Trustees in satisfaction of the property value  for Inheritance Tax mitigation.

Probate:

If your house and other assets are in joint names and you don’t  hold other assets in your own name then your estate will not have to go through probate on your death.  If you Sever your Tenancy then your Executors will have to apply to the probate court for a grant to enable them to deal with the property.

Probate Costs:

The costs involve in dealing with probate will depend on who does the work.  Typically a solicitor would charge £1,500 - £3,000 for dealing with a simple estate including the transfer of the property or £5,000 - £25,000 if you were unfortunate enough to ask your Bank.

If you subscribe to our company and utilize our free advisory service then you can dramatically reduce these fees depending on where you live by doing the work yourself with our guidance.  The minimum fee you can expect to pay is £130 which is the Probate Courts charge.

If your property is valued at over £570,000 and you wish to give your 50 per cent share of the property, there may be Inheritance Tax to pay on your death.  It is imperative you decide whether the gift is free of Tax or subject to Tax.  Remember Tax is 40% of everything over £285,000 & don’t forget to include gifts out of the estate, seven years prior to your death.

 Ø       Free of Tax ~ your spouse or partner or other beneficiaries have to pay the Tax       

Ø       Subject to Tax ~ the beneficiaries of the property have to pay the Tax             

Income & Capital Gains Tax on the Trust

Trusts are taxed at different rates depending on the type of Trust, but generally they are taxed for Income or Capital Gains similar to individuals but with less allowances.  Beneficiaries that are none Tax payers can reclaim any Tax paid and higher rate Tax payers would have to pay extra.  Capital Gains allowances for Trusts are half what an individual would expect to enjoy.

The property you live in is unlikely to produce an income, so Income Tax is not usually an issue.  However,  your property is likely to increase in value, and any gain above the annual Capital Gains allowance at the time of disposal may be subject to a charge.   If you are unsure as to your position you should seek advice from W.D.S Independent Financial Advisors, an Accountant or Tax Specialist.

Any income or capital Tax liability is normally insignificant compared to the amount of money saved on Community Care fees and the knowledge that at least half the property passes to your children and not your Widow/Widowers new partner.