Severance of Tenancy
Co-owners of a property can hold the beneficial interest in that property either as tenants in common or as joint tenants.
Where there is a joint tenancy, all the co-owners own the whole of the property collectively. Thus, a co-owner of a property held as a Joint Tenant does not own 50 per cent. But, rather, half of the whole. The essential feature of a beneficial joint tenancy is that there is the right of survivorship or ius accrescendi. Under the right of survivorship, on the death of one of the joint tenants, the jointly owned property passes to the remaining joint tenant (or tenants).
Thus, the deceased joint tenant’s interest ends on death and is automatically incorporated into the interests of the survivor (or survivors). This means that should the deceased have wished for their interest in that property to pass to someone other than the joint tenant (or tenants) then this will not happen – even if there is a Will naming the chosen beneficiaries as inheritors of that property.
In order to remove the right of survivorship, a beneficial joint tenant must sever the tenancy prior to death. The principles as to severance are contained within s 36(2) of the Law of Property Act 1925.
After severance the co-owners will hold the property as Tenants in Common – each with a definite share of a property.
An example of where a Tenancy in Common is required
Let’s say a married couple (or those in a Civil Partnership) who were co-owners of a property wished to write Wills to contain Nil Rate Band Discretionary Trusts. If they continued to hold their property as Joint Tenants, when one died, the land would automatically pass to the survivor the property.
This may not seem particularly onerous, perhaps the married couple wished for the other to inherit the property anyway. However, if, when the first died, the majority of their estate was held in the co-owned property, so much so that the other assets in the estate did not amount to a full Nil Rate Band amount, then, the executors would not have the ability to pass the full amount into the trust. They could not use the co-owned property as this would automatically belong to the other co-owner.
This might leave the beneficiaries of the Nil Rate Band Trust with much less of an inheritance than they believed they would receive.
Take, Adam and Belle, they bought a property worth £600k, they owned it as joint tenants. Adam also had savings and investments of about £350k. When Adam died, he wished for the amount that was equal to the prevailing Nil Rate Band to be put into trust for his two teenage children from a previous relationship. The rest of his estate was to pass to Belle.
However, Adam and Belle had spent much of their savings and other assets on home improvements so that, on Adam’s untimely death, the property was now worth £900k, however, his savings and investments had diminished to around £200k.
Although Adam’s estate is now worth £650,000, only the £200k would be free to be used in the Nil Rate Band Trust because the whole property would pass to Belle outright. Thus, the teenage children would not receive what Adam would have wished.
It is not only the estates of those with children from previous relationships that this affects. Many wish to leave the amount that does not attract inheritance tax to their children and leave the rest to their surviving spouse for their twilight years.
If the majority of the assets in the estate are made up of a property held as co-owners, this cannot work and there may need to be expensive and difficult methods required to put things right.
Because we do not know when we will die, or what assets will be held by our estate when we do, if a Will is written whereby some of the estate is to be used to form a trust, it is always best to have the co-ownership of any property changed from Joint Tenants to Tenants in Common.
Carr-Glynn v Frearson
In this actual case, an auntie put her house in joint ownership for herself and her nephew. She later asked her solicitors to make a Will leaving her share of the property to her niece. The solicitor discovered that the property was held as joint tenants and informed the auntie to sever the tenancy so that she would hold the house as Tenants in Common with her nephew. However she did not. Subsequently, the niece did not receive her inheritance!
Sometimes the pitfall are unseen, and, when they are, it is too late to do anything about it!
If you hold a property as a co-owner and wish for other beneficiaries to inherit other than the co-owner, please do give us a call on: 020 8920 3360 and we will be happy to help.
We look forward to hearing from you.