What Is a Severance of Tenancy?

INTRODUCTION

Severance of tenancy is a critical aspect of estate planning since it can substantially alter your intentions during the process of writing your Will. Making the switch from "Joint Tenancy" to "Tenants in Common" can change how the shareholding of a Testator's property after their death.

Continue reading if you'd like a better understanding of the legal and financial aspects of property ownership as it relates to estate planning. 

WHAT IS A SEVERANCE OF TENANCY?

A severance of tenancy occurs when the form of property ownership is changed from "joint tenancy" to "tenancy in common."

Let's break down the process:

Joint tenancy is usually the default assumption.

• Usually, when you purchase a property with another person, the default assumption is that you're purchasing the property as "joint tenants."

• "Joint tenancy" means that both of you own the whole property together. When one of the joint tenants dies, the property is automatically passed to the surviving owner. This is called the "right of survivorship."

How does right of survivorship affect the Will?

• Right of survivorship means that you are not able to leave your share of a property you own to somebody else in your Will.

• If the surviving owner isn't the intended Beneficiary, this could cause issues. 

SEVERANCE OF TENANCY CHANGES THE NATURE OF OWNERSHIP

When there is a severance of tenancy, then you both become "tenants in common" which effectively changes the nature of ownership in the property.

1. There's no right of survivorship

Unlike a tenancy in common, there is no right of survivorship with joint tenancy.

2. Percentage shares can be reflected differently

In the case of tenancy in common, each owner controls their respective share in the property. However, the default distribution doesn't necessarily need to be equal, and you can change this. For example, if two owners purchased a property with disproportionate contributions of, say, 70% and 30%, then the shares in the property can be reflected in the same way or in a way that is agreed upon.

3. Shareholdings become part of the respective owner's estate

Unlike joint tenancy, if one of the owners dies, their share doesn't automatically pass to the other owner(s). Instead, it becomes part of their Estate and distributed according to their Will (or according to the rules of intestacy if there's no Will).

This is an advantage in cases where the owners want their respective shares to go to different Beneficiaries.

However, it can also lead to issues if the respective wishes are not clearly defined in the Will. 

BE MINDFUL OF OTHER POTENTIAL CONSEQUENCES:

If you want to make the switch from joint tenancy to tenancy in common, you should also consider other potential consequences.

1. Inheritance Tax

Don't forget that Inheritance Tax may apply upon a person's death. And the threshold and rate may change, depending on the individual's circumstances.

If the property is owned as joint tenants, it might not be included in the deceased’s Estate for inheritance tax purposes (unless the survivor was not a spouse or civil partner).

On the other hand, when the property is owned as tenants in common, the deceased individual's share will be part of their estate and may be subject to Inheritance Tax.

2. Care Home Fees

An individual might be able to protect their share of a property from being used to cover the cost of care home fees under certain circumstances. By converting a joint tenancy into a tenancy in common, they can direct their share of a property into a Trust via their Will.

3. Changing Circumstances

Don't forget to update your Will to reflect any changes in circumstances such as divorce, marriage, or birth of a child, especially as it relates to the distribution of property ownership.

For example, if a property owner remarries, they may want to transition from a joint tenancy to a tenancy in common so that the individual's children from the previous marriage can inherit their share of the property.

Need to know more or you’d like to discuss your options?

Please note that transitioning from a joint tenancy and create a tenancy in common has significant legal, financial, and estate planning implications. Therefore, it's advisable to seek professional advice before proceeding.

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