Inheritance Tax And Tenants In Common
- MAZ
- Sep 12
- 16 min read
Understanding Inheritance Tax and Tenants in Common in the UK
Picture this: You're sorting through family papers after a loved one's passing, and suddenly the weight of inheritance tax hits you like a ton of bricks. As a tax accountant who's guided countless UK families through these choppy waters over the past 18 years, I've seen how property ownership can make or break your estate's tax bill. Let's cut straight to it – inheritance tax (IHT) in the UK for 2025/26 kicks in at 40% on estates over £325,000, but with clever planning using tenants in common, you could shield more of your hard-earned assets.
The nil-rate band remains frozen at £325,000, and the residence nil-rate band adds up to £175,000 if your home goes to direct descendants, potentially doubling to £1 million for couples. But here's the rub: how you own property – as joint tenants or tenants in common – can dramatically alter what HMRC takes. Recent HMRC data shows average IHT bills hovering around £200,000 per estate, with property often the biggest chunk. By switching to tenants in common, many of my clients have preserved their nil-rate bands and avoided unnecessary sales. Stick with me, and we'll unpack this step by step.
What Exactly Is Inheritance Tax in the UK?
None of us fancies a hefty tax bill from beyond the grave, right? Inheritance tax is essentially HMRC's claim on your estate – that's everything you own minus debts – when you pass away. For the 2025/26 tax year, if your estate's below £325,000, you're usually in the clear. Above that, it's 40% on the excess, though it drops to 36% if you leave 10% or more to charity. Sounds straightforward, but add in property, and things get tricky.
Take the thresholds: the standard nil-rate band (NRB) is £325,000 per person, unchanged since 2009 and frozen until at least 2030. Then there's the residence nil-rate band (RNRB), an extra £175,000 if your main home passes to children or grandchildren. For married couples or civil partners, unused bands transfer, so you could shield up to £1 million combined. But beware – the RNRB tapers off for estates over £2 million, vanishing entirely at £2.35 million.
In my practice, I've handled cases where clients underestimated this. One chap from Birmingham thought his £600,000 home was safe, but without proper ownership setup, his heirs faced a £70,000 IHT hit. Always check your estate value early; tools like HMRC's online calculator can help, but nothing beats a tailored review.
How Property Ownership Plays into IHT
Be careful here, because I've seen clients trip up when assuming all joint property is treated the same. In the UK, you can own property as joint tenants or tenants in common – and this choice is a game-changer for IHT.
As joint tenants, you own the whole property together equally. When one dies, it automatically passes to the survivor via 'right of survivorship' – no probate needed, and if it's to a spouse, no IHT due thanks to the spousal exemption. Handy for simplicity, but it wastes the deceased's NRB if everything just shifts over.
Switch to tenants in common, and each owns a distinct share – say 50/50 or even 70/30. No automatic transfer; your share goes into your estate and follows your will. This lets you direct it to a trust or kids, using your full NRB and RNRB. For unmarried partners, it's crucial since there's no spousal exemption – IHT could bite hard otherwise.
Why bother? It protects against scenarios like remarriage or care home fees eating into the estate. In Scotland, it's similar but termed 'joint owners' for joint tenancy and 'common owners' for tenants in common, with the same IHT rules applying UK-wide.
Comparing Joint Tenancy and Tenants in Common for IHT Purposes
So, the big question on your mind might be: which one's better for minimising tax? Let's break it down with a table to make it crystal clear – I've used these in client meetings to highlight pitfalls.
This isn't just theory; consider a couple with a £800,000 home. As joint tenants, first death transfers everything tax-free, but second death exposes the lot to IHT over £500,000 (assuming RNRB). As tenants in common, the first could will their share to a discretionary trust, preserving the NRB for later – potentially saving £130,000 in tax. I've advised on similar setups in London, where property values skyrocket the bill.
But watch out for Welsh or Scottish nuances – while IHT is uniform, Scottish succession laws give spouses and kids 'legal rights' claims, which could complicate tenants in common plans. Always factor that in.
Why Tenants in Common Shine for Estate Planning
Now, let's think about your situation – if you're a homeowner worried about IHT, tenants in common offers real muscle. It lets you ring-fence your share, perhaps into a trust, shielding it from the survivor's future risks like bankruptcy or new marriages.
One anonymised case from my files: A Manchester widow, let's call her Eileen, owned her home jointly with her late husband. After his passing, she severed to tenants in common and willed her half to a trust for her kids. When she needed care, the local authority couldn't touch the trusted share – saved her family thousands. Without that, the full home might've been sold.
It's not all rosy; unequal shares need documenting to avoid disputes. And for business owners, layering in business property relief (BPR) – which can wipe out IHT on qualifying assets – makes it even stronger. More on that later.
Spotting When Joint Ownership Might Cost You
Ever stared at your deeds and wondered if they're set up right? Many don't realise joint tenancy is the default for couples, but it can lead to overpaying IHT. If your estate's pushing £500,000+, switching could unlock reliefs.
In rare cases, like with non-resident owners, the new 2025 residence-based rules apply – if you've been UK-resident 10+ years, worldwide assets (including overseas property shares) fall into IHT scope. I've counselled expat-returnees on this; severing early prevents nasty surprises.
For a quick check: Grab your Land Registry title (via [www.gov.uk/search-property-information-land-registry]). If it says 'no restriction', it's likely joint tenancy. Time to consider change?
Real-World Calculation: Estimating Your IHT Liability with Property
Crunch the numbers yourself – it's empowering. Start with estate value: Home + savings + investments - debts.
Example: £700,000 estate, £400,000 home as tenants in common. First death: £350,000 share to trust (uses NRB, no IHT). Survivor has £350,000 home share + other assets. Second death: Full NRBs transfer, taxing only over £1m if RNRB qualifies.
Without tenants in common? Potentially £148,000 IHT on second death. Use HMRC's tool at [www.gov.uk/inheritance-tax-reduced-rate-calculator] for precision, but plug in scenarios.
I've seen business owners overlook this – if your property's tied to a trading company, BPR could reduce IHT to zero on that share. But with 2026 changes capping BPR at £1m for 100% relief, act now.
UK Inheritance Tax Statistics
Navigating Tenants in Common and IHT Planning with Practical Steps
So, you’re starting to see how tenants in common could be a game-changer for your estate, but how do you actually make it happen? Over my 18 years advising UK families, I’ve walked clients through the nitty-gritty of switching property ownership and dodging IHT pitfalls. Let’s roll up our sleeves and break down the practical steps, real-world snags, and tailored strategies for homeowners, business owners, and even those with tricky situations like second homes or Scottish properties. By the end, you’ll have a clear roadmap, plus insights from cases I’ve handled to keep you ahead of HMRC’s curve.
How to Switch from Joint Tenancy to Tenants in Common
Picture this: You’ve just checked your property deeds and realised you’re joint tenants, but tenants in common could save your family thousands in IHT. The process, called severance, is simpler than it sounds, but it’s not just paperwork – it’s about intent.
● Step 1: Agree with Co-Owner – Both parties (or all, for multiple owners) must consent. I’ve seen cases where one partner dragged their feet, so discuss tax savings early. If it’s just you due to a death, you’ll need legal advice to act on the estate’s behalf.
● Step 2: Serve a Notice of Severance – Draft a written notice (a simple letter will do) stating intent to sever. Both sign, date, and keep copies. No need to notify HMRC yet, but store it safely.
● Step 3: Update Land Registry – Complete Form SEV (free if DIY, or about £200 via a solicitor) and send it to the Land Registry. Check [www.gov.uk/government/publications/severance-of-a-joint-tenancy] for the form. This adds a restriction, ensuring shares follow your will.
● Step 4: Update Your Will – Crucial. Direct your share to kids, a trust, or charity to use your nil-rate band (£325,000) or residence nil-rate band (£175,000). I’ve seen clients forget this, leaving shares in limbo.
One case from Leeds sticks with me: A couple, Sarah and Tom, severed their £650,000 home’s tenancy. Sarah’s share went to a trust on her passing, saving £80,000 in IHT when Tom died. Without severance, the full estate faced tax. Timing matters – do this before health declines.
Setting Up Shares in Tenants in Common
Now, let’s think about your situation – are equal shares always best? Not necessarily. You can split ownership 60/40, 70/30, or any ratio, but it must reflect contributions or intent. For business owners, this is gold. If you’ve poured business profits into the home, a larger share might qualify for business property relief (BPR), slashing IHT.
Document the split clearly in a Declaration of Trust – a legal agreement stating shares and terms. I’ve advised clients who skipped this, only for HMRC to challenge unequal splits during probate. Costs? About £500-£1,000 via a solicitor, but it’s worth it.
For Scottish readers, beware: ‘Legal rights’ mean spouses or kids can claim part of your estate, even with tenants in common. One Glasgow client, Fiona, assumed her 70% share was safe for her kids, but her husband’s legal rights ate into it. Always consult a Scottish solicitor for succession quirks.
Using Trusts to Supercharge IHT Savings
Trusts sound posh, but they’re a workhorse for IHT planning with tenants in common. By directing your share to a discretionary trust, you keep it out of the surviving owner’s estate, preserving your nil-rate band. For 2025/26, that’s £325,000 tax-free, plus £175,000 if the residence nil-rate band applies.
Here’s how it works: On first death, your share goes into the trust, not to the survivor. The trust can lend or gift funds back to them, maintaining their lifestyle while shielding assets from IHT. I’ve set these up for London clients with £1m+ estates, saving £100,000+ in tax.
But trusts aren’t DIY. Setup costs (£2,000-£5,000) and ongoing fees apply, plus HMRC’s 10-yearly trust charges (up to 6% on excess over £325,000). One client, a Bristol business owner, paired BPR with a trust, slashing his IHT to near zero. Check HMRC’s trust guidance at [www.gov.uk/trusts-taxes].
Common Pitfalls and How to Avoid Them
Be careful here, because I’ve seen clients trip up when rushing into tenants in common. First, not updating wills post-severance is a classic error – your share defaults to intestacy rules, potentially taxing everything. Second, assuming automatic IHT savings is risky; without a trust or direct bequest, your share might still inflate the survivor’s estate.
Another trap: Forgetting care home fees. If the survivor needs care, local authorities assess the whole property unless shares are clearly separated. A Devon couple I advised narrowly avoided this by severing and trusting their shares early.
For business owners, watch BPR changes. From April 2026, 100% relief on business assets drops to 50% above £1m, per HMRC’s 2025 Budget update. Plan now to lock in relief.
Tailoring for Business Owners and Self-Employed
If you run a business or freelance, tenants in common can align with your tax strategy. Say your home’s part-funded by business income – a larger share could qualify for BPR, wiping out IHT on that portion. I’ve worked with a Manchester contractor who allocated 75% of his home to his business-owning spouse, leveraging BPR to save £120,000.
Self-employed? Watch side income. HMRC’s been cracking down on unreported rental or gig income since 2023, often caught during IHT audits. One client, a self-employed consultant, faced a £15,000 penalty for undeclared Airbnb earnings tied to a second home. Declare everything via Self Assessment at [www.gov.uk/log-in-file-self-assessment-tax-return].
Handling Second Homes and Non-Standard Cases
Got a holiday home or overseas property? Tenants in common still works but gets complex. For UK second homes, both qualify for RNRB if left to descendants, but only one gets the relief. Choose wisely – usually the main residence.
Overseas properties? Since 2025, non-residents owning UK property shares face IHT if UK-resident for 10+ years. A Kent client with a Spanish villa got stung because his tenants in common share was UK-taxable. Always check double-tax treaties via [www.gov.uk/government/collections/tax-treaties].
In rare cases, like remarried couples, tenants in common prevent new spouses claiming the whole estate. I’ve advised blended families to use trusts to balance kids’ inheritance with spousal support.
Worksheet: Mapping Your IHT Exposure
Here’s a quick tool I share with clients to estimate IHT and see if tenants in common helps:
List Assets: Home value, savings, investments, business assets.
Deduct Debts: Mortgages, loans.
Apply NRB (£325,000): Subtract from total estate.
Check RNRB (£175,000): Applies if home goes to kids/grandkids.
Calculate Taxable Amount: Excess over thresholds at 40%.
Test Tenants in Common: Split home share; redirect to trust/kids to use NRB.
Example: £900,000 estate, £500,000 home. Tenants in common with 50% to trust saves £80,000 vs joint tenancy’s full tax hit. Run numbers at [www.gov.uk/inheritance-tax].
Advanced IHT Strategies and Key Takeaways for Tenants in Common
Maximising Reliefs with Tenants in Common
Ever wondered how far you can stretch those IHT reliefs? Tenants in common opens doors to reliefs that joint tenancy often locks shut. Beyond the standard nil-rate band (£325,000) and residence nil-rate band (£175,000), you can tap into others, like business property relief (BPR) or agricultural property relief (APR).
For business owners, BPR is a lifeline. If your home or a share is tied to a qualifying trading business – say, you run a shop and use part of your home as an office – that share could get 100% IHT relief (50% above £1m from April 2026). A client in Cardiff, let’s call her Priya, owned a £700,000 home as tenants in common with her husband. Her 60% share, linked to her catering business, qualified for BPR, wiping out £112,000 in potential IHT. The catch? You need meticulous records proving business use – HMRC’s audits are fierce.
APR works similarly for farmland or rural properties. I advised a Norfolk farmer who switched to tenants in common, allocating his share to a trust that qualified for 100% APR. Result? Zero IHT on a £500,000 plot. Check eligibility at [www.gov.uk/guidance/agricultural-relief-on-inheritance-tax].
Blended Families and Protecting Your Legacy
Be careful here, because I’ve seen clients trip up when planning for stepchildren or second marriages. Tenants in common shines for blended families. Without it, your share might pass to a new spouse, sidelining kids from a first marriage. By severing to tenants in common, you can will your share to your children or a trust, securing their inheritance.
Take a Bristol client, Mark, remarried with two kids from his first marriage. His £800,000 home was joint tenancy, risking his new wife inheriting everything. We switched to tenants in common, with his 50% share going to a trust for his kids. When he passed, the trust protected £400,000 from IHT and ensured his children’s future. Without this, his kids might’ve got nothing if his wife remarried or spent the estate.
Scottish readers, note: ‘Legal rights’ claims can override your will, so trusts are even more critical north of the border. A Glasgow solicitor can align your plan with succession laws.
Handling High-Value Estates and Tapered Reliefs
If your estate’s creeping past £2 million, the residence nil-rate band (RNRB) starts shrinking – £1 for every £2 over £2m, gone by £2.35m. Tenants in common can help by splitting ownership to keep each partner’s estate below the taper threshold.
A London couple I advised had a £2.2m estate, including a £1.5m home. As joint tenants, their combined estate lost £100,000 of RNRB on the second death. By switching to tenants in common and using trusts, each kept their estate under £1.1m, preserving the full £175,000 RNRB per person – a £80,000 tax saving. Run your numbers at [www.gov.uk/inheritance-tax-reduced-rate-calculator] to see the taper’s impact.
For ultra-high-value estates, consider gifting. Gifts made seven years before death are IHT-free, but tenants in common lets you gift property shares into trusts without disrupting the survivor’s home. I’ve seen this save six-figure sums for wealthy clients in Surrey.
Avoiding HMRC Audits and Errors
None of us loves tax surprises, but HMRC’s IHT audits are on the rise, with £5.5bn collected in 2024/25, per HMRC data. Common errors? Misreporting property shares or forgetting to declare lifetime gifts. Tenants in common requires clear documentation – a Declaration of Trust and updated will – to avoid HMRC disputes.
One client, a self-employed consultant in Manchester, faced a £20,000 penalty because his unequal 70/30 property split wasn’t documented. HMRC assumed 50/50, inflating his estate’s tax. Always keep records watertight, and check your estate’s value yearly via [www.gov.uk/check-income-tax-current-year].
For business owners, misapplying BPR is another trap. HMRC rejects claims if your business is deemed ‘investment’ (e.g., property letting) rather than trading. A Birmingham landlord I advised lost 50% BPR because his rentals didn’t qualify. Test your business at [www.gov.uk/business-relief-inheritance-tax].
Checklist: Securing Your IHT Plan with Tenants in Common
Here’s a practical checklist I give clients to lock in their IHT strategy:
● Confirm current ownership (joint tenancy or tenants in common) via Land Registry.
● Discuss severance with co-owners; agree on share splits.
● Draft and sign a Notice of Severance.
● Submit Form SEV to Land Registry.
● Create a Declaration of Trust for unequal shares.
● Update your will to direct shares (e.g., to kids or trust).
● Check BPR/APR eligibility for business or farm assets.
● Review estate value against NRB (£325,000) and RNRB (£175,000).
● Consider trusts for high-value estates or blended families.
● Keep records for HMRC audits – wills, trusts, property deeds.
Summary of Key Points
IHT kicks in at 40% above £325,000 – Use tenants in common to leverage your nil-rate band fully.
Tenants in common splits property into distinct shares – Unlike joint tenancy, your share follows your will, not the survivor.
Switching requires severance – A simple notice and Land Registry update (Form SEV) does it, but update your will too.
Trusts amplify savings – Direct your share to a discretionary trust to shield it from the survivor’s estate, saving up to £130,000.
Business owners can use BPR – Link your property share to a trading business for up to 100% IHT relief (50% above £1m from 2026).
Blended families need extra care – Tenants in common ensures kids from prior marriages inherit, avoiding spousal overrides.
○ Trusts can balance new partners and kids’ claims, especially in Scotland.
High-value estates face RNRB taper – Split ownership to keep each estate under £2m and preserve £175,000 relief.
Document everything – A Declaration of Trust and clear records prevent HMRC audit penalties.
Scottish succession laws add complexity – Legal rights claims may override your will, so use trusts and local solicitors.
Act early – Sever tenancy and plan trusts before health declines to avoid care home or probate issues.
FAQs
Q1: What's the key IHT advantage of tenants in common over joint tenancy for married couples?
A1: Well, it's worth noting that with tenants in common, you can direct your share straight into a trust on death, preserving your nil-rate band for the kids rather than letting it roll over unused. In my experience advising couples in the Midlands, this has saved families tens of thousands – think of a hubby who passed his half of the family home to a trust, dodging a hefty bill when his wife followed years later.
Q2: Can tenants in common reduce IHT exposure for unmarried partners?
A2: Absolutely, and this is a lifesaver for cohabiting couples without the spousal shield. By holding as tenants in common, your share goes via your will, potentially to trusts or heirs, sidestepping the full 40% hit on the survivor's estate. I've seen a London pair avoid a £50,000 sting by severing their tenancy early – otherwise, the surviving partner could've faced tax on the lot.
Q3: Does the spousal exemption still apply if we're tenants in common?
A3: Yes, it does, as long as you leave your share to your spouse in the will – the exemption kicks in regardless of ownership type. But here's the nuance: if you bypass them for the kids, you lose it. A client of mine in Bristol tweaked his will just in time, ensuring his wife got the exemption while ring-fencing assets for his stepkids.
Q4: How does IHT work on joint bank accounts held as tenants in common?
A4: Joint accounts are typically joint tenancy by default, but if you've set them as tenants in common – rare but possible – your share forms part of your estate for IHT. In practice, I've advised folks to check statements; one saver in Manchester discovered his unequal split triggered a small IHT bill, but we claimed relief to soften it.
Q5: What if a tenant in common dies without a will – is IHT still due?
A5: Intestacy rules take over, so your share passes to next of kin, and yes, IHT applies if the estate tops £325,000. It's a common pitfall; consider a widow in Leeds whose late husband's share went to distant relatives, inflating the tax – always draft that will to steer clear of such messes.
Q6: Can business owners use tenants in common to boost business property relief on their home?
A6: Spot on for those mixing home and business – if part of your property qualifies as business use, tenants in common lets you allocate a share for BPR, potentially zeroing IHT on it. A shop owner I know in Birmingham did this with his attached flat, claiming full relief before the 2026 cap bites.
Q7: How do Scottish legal rights affect IHT planning with tenants in common?
A7: In Scotland, spouses and kids have 'legal rights' claims on your estate, which can override your will and complicate IHT. Tenants in common still help, but trusts are key to balance. I've guided a Glasgow family where this claim nibbled at the share, but a solid trust minimised the tax fallout.
Q8: Does UK IHT apply to overseas property held as tenants in common?
A8: If you're UK-domiciled, yes – your worldwide share falls into the IHT net, though double-tax treaties might ease it. Picture an expat client with a Spanish villa; we severed to tenants in common, directing his portion to heirs and claiming relief to cut the bill.
Q9: How do you value an unequal share in tenants in common for IHT purposes?
A9: Base it on the market value proportionate to your share, but factor in any discounts for minority holdings. In my dealings, a 30% share often gets a 10-15% valuation dip; one sibling in Kent saved by proving this, trimming the estate value just under the threshold.
Q10: Does switching to tenants in common trigger capital gains tax?
A10: No, severance itself doesn't count as a disposal, so no CGT hit – it's just a tweak in ownership form. But watch for stamp duty if you're adjusting shares with money changing hands. A couple I advised in Surrey switched seamlessly, no tax surprise, but always confirm no hidden transfers.
About the Author
Maz Zaheer, AFA, MAAT, MBA, is the CEO and Chief Accountant of MTA and Total Tax Accountants, two premier UK tax advisory firms. With over 15 years of expertise in UK taxation, Maz provides authoritative guidance to individuals, SMEs, and corporations on complex tax issues. As a Tax Accountant and an accomplished tax writer, he is renowned for breaking down intricate tax concepts into clear, accessible content. His insights equip UK taxpayers with the knowledge and confidence to manage their financial obligations effectively.
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