Inheritance Tax as joint owners of a house.

[DaffodilValley]

I’ve been listening to what Martin Lewis has been saying about how inheritance tax affects people who live together but aren’t married.

The threshold is £325k which seems a lot but our house is currently worth about £300k.

We are not married and own the house jointly and have left everything to each other.

Does inheritance tax use the total value of the house as the amount, or just our personal share?

If we are regarded as inheriting £150k each then we are nowhere near the threshold and don’t need to bother with civil partnership, but if it’s seen as the full value of the house for each of us despite technically owning half, then I think it’s going to be something we need to consider.

I’m very concerned about one or other of us ending up having to sell the house to pay the bill, but for other reasons I’m very reluctant to go down the civil partnership route if it isn’t completely necessary.

Does inheritance tax use the total value of the house as the amount, or just our personal share?

the surviving partner isn't inheriting the whole value of the house, only the amount being passed to them by their deceased partner. That's the amount for which inheritance tax is relevant, and as it is £150,000 it falls well within the tax threshold.

consider also, whether you have or could have in future, additional assets that take the amount over the threshold.

If you own the house as joint tenants then IHT is irrelevant on the first death. If you own it as tenants in common then on the first death the survivor (assuming that’s the person who inherits the dead one’s share) pays IHT on the value of what they inherit, ie half (or whatever proportion of the house they inherit).

Thank you! I did think it wouldn’t apply to us, but I didn’t want to make a big mistake and one of us end up in trouble.

I can’t think of any situation in which either of us would suddenly get any more money (sadly) and my main concern about civil partnership is the risk of being considered liable for my partner’s debts, so we won’t go over the threshold in any other way than the house increasing in value.

What about pensions ?
If either of you is in line to get a Defined Benefit Pension, bear in mind that some will only pay our a survivors pension to a spouse / civil partner, and not to a surviving partner. It's the main reason I married my DH after over 20 years living together.

Also make wills appointing each other as executors, as otherwise it will be blood relatives who have first option on administering the estate under the intestacy laws.

We both have defined benefits pensions and neither will pay out to the other. They are minimal, around £2500 a year in my case, perhaps less in my partner’s case.

Even if it were possible to set the survivor’s pension, for mine it would be £1600 a year.

My partner has no other pensions, I have a private pension of £34k which would be left to him, but that’s not going to take him above the threshold even if I were to die tomorrow.

I got our wills sorted out last year, we have each other and a relative named as executors.
What I haven’t done is got POA done, which really must be my next job.

Who will inherit after second death? As at that point the estate will likely be more than £325k and then there may be inheritance tax to pay.

Everything will be split between our surviving siblings, we don’t have children.
We both have disabilities so I expect that care costs will eat into what is left. Even now, with me still working, neither of us come anywhere near the threshold if the house is split between us, so there is no way anything is going to increase to that level now.

Unless I’m missing something of course - if so please correct me because I have no experience in any of this!

Can you explain how Civil Partnership makes you liable for you partner's debts?

I'm pretty sure that in either marriage or CP the spuse/partner's creditors can't look to you unless you were a party to the transaction.

Just be mindful if you own with somebody who gets into debt that even if you are beneficial joint owners of undivided shares, where right of survivorship applies on death of first owner ( so no IHT issues) , if a co owner gets into a bankruptcy situation that automatically severs the beneficial ownership into divided shares and the trustee can realise the debtors share of the asset. The courts only have powers to postpone a sale for up to 12 months, or for you as remaining owner to buy the other share from the trustee in bankruptcy. I mention it as an acquaintance of mine had to pay of her husband debts to save the family home from her husband's bankruptcy. Effectively she had to take out a huge mortgage to cover his equity that had to be paid to his trustee.

That is not correct, if you are not married or in a civil partnership and your estate, including your deemed share of jointly held assets, will be subject to IHT above the nil rate band.

You can also not inherit each others nil rate bands.

You really need to be clear on whether you own as joint tenants or tenants in common OP.

Don't want to divert the thread, but how easy is it convert from Tenants in Common to Joint Tenants?

You also don't get the extra £175,000 IHT allowance unless leaving property to direct descendants( children, grandchildren) . A cohabiting partner does not count as direct descendant, even if they spent years caring for their deceased partner.
There might be changes in the law in the future but it's a big gamble to rely on future changes if there is a risk of IHT being payable. It can be a lot of money for a surviving partner to find, as well as dealing with bereavement and reduced income at the same time.

This is wrong. The fact it's a joint tenancy means that it passes to the other owner automatically but it's still within the estate for IHT purposes (otherwise you could very easily avoid IHT!)

The value of the joint half of the house is considered part of the deceased’s estate for IHT purposes (obviously if £150k is essentially the value of the whole of the estate no IHT will be required to be paid). A friend recently had to pay IHT because half the value of the estate went over the £325k threshold and they were not married/civil partnership. They didn’t want to sell and had to raise funds to pay the bill.