Quick answer: Tenants in common inheritance tax planning lets each owner control their share, use personal allowances, and consider will trusts. Beware gifts with reservation and deprivation rules.

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Owning property as tenants in common is increasingly popular among couples, friends, and family members who want flexibility and control over their share of a home. But when it comes to inheritance tax (IHT) planning, the choices you make now can have a lasting impact on your loved ones and your estate. This guide will help you understand how tenants in common works, how to use your personal allowances, and what to watch out for when planning for the future.

What Does “Tenants in Common” Mean?

When you own property as tenants in common, each person owns a distinct share—often split 50:50, but it can be any proportion, such as 60:40. Unlike joint tenants, your share doesn’t automatically pass to the other owner if you die. Instead, you can leave your share to whoever you choose in your will.

This flexibility is powerful for inheritance tax planning, but it also means you need to be proactive about your arrangements.

Planning Options—How to Make the Most of Your Ownership

1. Wills with Life Interest or Discretionary Trusts

One of the most effective ways to protect your partner or family is to use your will to create a life interest trust. This means your share of the property passes into a trust when you die, allowing your partner to live in the home for life, but ultimately passing your share to your children or other beneficiaries.

For example, Sam and Noor own their home as tenants in common, with a 60:40 split. Their wills give the surviving partner a life interest in the other’s share, so the survivor can stay in the home. When both have died, the property passes to their children. This arrangement uses both nil-rate bands (the amount each person can pass on tax-free) and keeps flexibility for changing family circumstances.

Discretionary trusts can also be used to give your executors flexibility to decide who benefits, which can be useful if your family situation is complicated or you want to protect against future care fees.

2. Deed of Trust—Fixing Ownership Shares

A deed of trust is a legal document that sets out exactly who owns what share of the property. This is especially important if you’ve contributed different amounts to the purchase price, or if you want to make sure your share is protected in case of relationship changes.

Having a clear deed of trust makes it easier to plan your will, calculate IHT, and avoid disputes later on. If you remortgage or add a new partner, update your deed and your will to reflect the new arrangements.

3. Using Nil-Rate Bands and Residence Nil-Rate Band

Each person has a nil-rate band (currently £325,000) that can be passed on free of IHT. If you leave your share of the home to a direct descendant (child, grandchild, etc.), you may also qualify for the residence nil-rate band (up to £175,000). Planning your wills to use both allowances can significantly reduce the IHT bill.

For example, if Sam and Noor each leave their share to their children, their estate could benefit from both nil-rate bands and both residence nil-rate bands, potentially passing on up to £1 million tax-free.

Pitfalls—What Can Go Wrong?

Gifts with Reservation of Benefit

If you try to give away your share of the property but continue to live there or benefit from it, HMRC may treat it as a “gift with reservation.” This means the gift is ignored for IHT purposes, and your share is still counted as part of your estate. For example, transferring your share to your children but staying in the home without paying market rent is a classic gift with reservation.

Deprivation of Assets and Care Fees

If you restructure ownership to avoid care fees, local authorities may apply deprivation of assets rules. This means they can ignore the transfer and still count your share when assessing your ability to pay for care. If you’re considering this, get advice and keep clear records of your intentions.

Not Updating Wills or Deeds

Life changes—remortgages, new partners, or family events—can affect your ownership and your estate plan. If you don’t update your will or deed of trust, your wishes may not be carried out, and your loved ones could face unnecessary tax or legal disputes.

Real Example—How It Works in Practice

Sam and Noor own their home as tenants in common, with Sam holding 60% and Noor 40%. Their wills give the survivor a life interest in the other’s share, so the surviving partner can stay in the home for life. When both have died, the property passes to their children. This arrangement uses both nil-rate bands and keeps flexibility for changing circumstances, such as remarriage or care needs.

If Sam dies first, Noor can stay in the home. When Noor dies, the property passes to the children, using both parents’ allowances and minimising IHT.

Practical Steps—What Should You Do Now?

1. Check Your Ownership Structure:
   Confirm you own as tenants in common and know your exact shares. If you’re unsure, check your title deeds or ask your conveyancer.

2. Make or Update Your Will:
   Ensure your will reflects your wishes and makes use of life interest or discretionary trusts if appropriate. Review your will after major life events.

3. Consider a Deed of Trust:
   If your ownership shares aren’t clear, or you want to protect your investment, create or update a deed of trust.

4. Use Your Allowances:
   Plan to use both nil-rate bands and residence nil-rate bands if possible. Make sure your will leaves your share to direct descendants to qualify.

5. Avoid Informal Gifts:
   Don’t transfer your share informally while continuing to benefit, as this risks a gift with reservation and could lead to unexpected IHT.

6. Review After Remortgage or New Partner:
   Update your will and deed of trust if your circumstances change.

7. Keep Records:
   Save copies of your will, deed of trust, and any correspondence about gifts or transfers.

Final Thoughts

Tenants in common ownership gives you control and flexibility, but it also requires careful planning. By making clear arrangements, using your allowances, and avoiding common pitfalls, you can protect your loved ones and minimise inheritance tax. If your situation is complicated, take time to review your options and keep everything up to date.

Disclaimer: This article provides general information for educational purposes only. It is not legal, medical, financial or tax advice. Outcomes can vary based on your personal circumstances.