Our homes are often the largest asset that is passed on in a Will and it is common for parents to leave their property to their children after they die. This is usually the case when an elderly parent has no surviving spouse. In an ideal world, the children of a deceased parent would be able to agree on how this inheritance is shared and be managed together but, sadly, disputes are common.
In this feature, we take a look at the various ways that siblings can share the inheritance of a family home and discuss the options available including selling up or renting to living together in the property.
- What options do I have for inheriting a house with siblings
- What if we inherit a property that still has a mortgage?
- What happens when one sibling is living in an inherited property and refuses to sell?
- How do siblings co-own an inherited property?
- Does a property have to be sold to pay inheritance tax?
- Do we need to advise the HMRC if we keep the house?
What Options Do I Have for Inheriting a House with Siblings?
In an ideal scenario, siblings who inherit a property together will be able to agree on what happens next. However, life is rarely this simple and deciding what to do with a shared asset, like a family home, can often be a point of contention, even in close families.
So, what options do you have for how a home that is inherited with siblings is dealt with?
Sell the Property and Divide the Cash Equally
If you and your siblings have no strong feelings about retaining the property then selling it can offer the simplest solution.
In order to sell the property, you will need to have the agreement of all siblings who have a share in the house.
You will also need to consider when to sell the property and this can often be a point of conflict.
The reasons for selling up can be motivated by financial need and one (or more) sibling(s) may be keen to sell immediately.
The decision of when to sell can be affected by the current property market. For some people, there is no strong drive to secure the cash from a quick sale and they may prefer to wait until house prices are stronger.
It is also worth bearing in mind that if you do choose to wait until the value of the property has risen then you will be judged to have made a profit on your inheritance and therefore have to pay Capital Gains Tax on this element of the sale value. You can deduct reasonable expenses to reduce this tax liability but waiting for an increase in house prices may not end up being as lucrative as you think.
One Sibling Buys Out the Other Sibling(s)
Most properties that are passed on to siblings will be equally divided between all parties, unless the decedent has stipulated otherwise in their Will. This scenario is very unusual and is not always legally binding as children who are disinherited can contest the Will.
If one sibling wishes to purchase the house and the other sibling(s) agree then a buy out can also be another relatively simple way to split the inheritance.
As co-owner of the property, you would only have to raise the finance to buy the remaining share of the house. In order to do this, you would need to agree the value of the property and either pay using any cash you may be able to access or arrange a mortgage lender to provide you with a loan.
The costs for settling this kind of transaction are minimal and you would only need to pay legal fees for the transaction plus any valuation fees that a mortgage lender may insist on.
If you are unable to secure a mortgage with a lender then you could discuss a private arrangement with your sibling(s). Effectively, the sibling who does not want to keep the house becomes a lender themselves and finances the house purchase for you.
There are pros and cons to an arrangement of this nature.
Firstly, both of you will continue to own an asset which, over time, may appreciate. The sibling who is financing the private mortgage will continue to own equity in the home until such time as you have fully repaid their share of the loan (including any agreed interest).
For situations where one sibling needs access to money from the sale of the home but one sibling wishes to live in the property, this kind of agreement can be an effective compromise for both parties. One receives a regular income from the ‘mortgage’ payments that are made whilst the other can live in the property and, eventually, own it.
The value of the repayments may be agreed simply to cover the inherited value of the home or could include interest.
On the downside, one sibling cannot access the full value of the property at once and retains a legal ownership of part of the property. The arrangement is also entirely dependent on the ability of one sibling to be able to meet the monthly repayments in full and on time. Lastly, there is no legal assurance (unless you create one) that the sibling who is not living in the property may not decide to sell their share at a later stage. They can only do this if the ownership is tenancy in common (see ‘How Do Siblings Co-Own an Inherited Property?’, below) however, there is nothing to prevent them selling their share to any third party.
This kind of agreement works best if there is a formal deed of trust that is signed between all parties that allows the sibling(s) who are financing the ‘mortgage’ the ability to foreclose if payments are defaulted. Whether you think this is necessary is entirely between you and your siblings but having the agreement in writing is essential. Bear in mind that, if anything were to happen to your sibling and they did not leave formal documents about your agreement then your home could be at risk.
One Sibling Sells Their Share Whilst the Other(s) Retain Theirs
It is common for siblings to disagree over what happens with an inherited property and a split in preference between selling the house and keeping it can cause family divisions.
If one sibling is intent on realising the cash value of their inherited asset but the other sibling(s) are not then one option is to sell a share in the property to a third party. This can result in a far more complicated situation and is not generally regarded as a good idea unless the third party is known to, and trusted by, the family.
You can only sell your share of a jointly owned property if ownership is deemed to be tenancy in common rather than joint tenancy (see ‘How Do Siblings Co-Own an Inherited Property?’, below).
Keep the Property as a Rental Investment
Rental may also be an option and offers a compromise on selling the home if one (or more) sibling(s) wish to reside in the property.
Providing you and your sibling(s) can manage a relationship as co-owners then you could both benefit from an appreciable asset, regular income and the emotional security of knowing the house is still in the family.
The arrangements of how the logistics of the rental is to take place should be agreed between all siblings and carefully documented to avoid any disagreements.
There are lots of ways in which the rental of an inherited property can be managed practically and thought should be given to how the rental income is split if:
- One (or more) sibling(s) will live in the property – is a reduced rate of rental agreeable to all parties?
- One (or more) sibling(s) takes responsibility to manage the rental arrangements – should they receive a larger split of the income?
You should also bear in mind that any monies earned through the rental of your inherited property will be subject to Income Tax and must be declared to HMRC on your tax return.
Share the Property as a Principle Residence
This may be the least suitable of options but could work for some families depending on their relationship and the size of the property in question.
It is perfectly acceptable for siblings to share an inherited property as their primary residence and each will continue to own their share of the home.
It may be worthwhile agreeing how bills relating to the upkeep and maintenance of the property are to be shared and maybe to contribute (instead of mortgage repayments or rent) to a joint account for these expenses.
What If We Inherit a Property That Still Has a Mortgage?
If your parents did not own their home or have life insurance that would repay any outstanding money owed against their property then this will be factored in to the probate calculations when settling Inheritance Tax.
Though this will reduce any tax liabilities to HMRC, it does mean that sibling(s) will only share ownership of a part of the property.
This can affect the decisions over what to do with a home as all co-owners will now be liable for the mortgage repayments.
This often is a prime driver for siblings who already own their own property to sell the house as they are unable to pay for a second mortgage (even if this is a 50:50 share).
What Happens When One Sibling is Living in an Inherited Property and Refuses to Sell?
In some cases, one member of the family may already be living in a property that becomes a gift in a Will to be shared with other siblings.
If this is the case and the siblings who do not live in the property wish to sell the home in order to liquidate the assets and divide the inheritance then there are options.
Firstly, and the most equitable solution, would be for the sibling who is living in the home to arrange to buy out the other parties. They can either arrange to do this with private funding, using a mortgage or even buying the other owners out in instalments. If you can come to this kind of arrangement in a fair and peaceable way then this can solve a great deal of stress when you consider the alternatives.
The alternatives are far less palatable when it comes to maintaining a harmonious family relationship, namely requesting the executors to take court action to force a sale under the Trusts of Land and Appointment of Trustees Act 1996 – there is no guarantee that a court will back this kind of action, particularly if the sibling in residence has children living with them under the age of 18. You should also bear in mind that if you have agreed, even for a short period, that your sibling may remain in situ then a court could grant the defence of ‘estoppel’. This simply means that you have given your word about something which you later go back on.
In extreme circumstances, the sibling who is living in the inherited property may file a claim against your parent’s Will under the Inheritance (Provisions for Family and dependants) Act 1975. This must be filed within 6 months of the Grant of Probate and would be based on the assertion that the parent in question did not make adequate provision for one (or more) of their children in their Will.
How Do Siblings Co-Own an Inherited Property?
Where siblings inherit a property from their parents which they intend to keep, either for rental or with one party living in the house, it is important that a decision is reached as to how legal ownership is defined if this is not already stipulated in the Will.
There are two options for this, each having implications for how a share in the property can be transferred or may be passed on in the event of the death of one of the siblings.
The first option is to own the property as joint tenants. This means that your share in the property is equal but, in the event of the death of one sibling, their share is automatically passed to the surviving sibling. This means that only the final sibling with 100% share of the property may bequeath the house to someone in their will.
As joint tenants you may not sell your share in the property unless it is to your co-owner(s).
The second option is to own the property as tenants in common. In this instance, you will agree to the exact share that is owned by each sibling and this portion may be gifted in the will of any sibling in the event of their death. The shares divided in this scenario do not have to be equal and could be divided as you so wish, as long as all parties agree.
As tenants in common you may sell (or gift) your share of the property to anyone you choose.
If no ownership arrangement is specified in the Will then the default arrangement is usually tenancy in common.
Does a Property Have To Be Sold to Pay Inheritance Tax?
Inheritance Tax is due on any estate that is valued at £325,000 and above. This threshold increases to £450,000 if the main property is being left to the deceased’s children.
If the estate still exceeds this threshold and there is Inheritance Tax to pay then the sale of the deceased’s home may be the only way to meet this liability.
No sibling can force the sale of a property in order to do this; only the estate’s executor has this power. However, if you are unable by other means to pay the Inheritance Tax to HMRC then the executor may force a sale to ensure that this debt can be paid.
Of course, it is common for parents to appoint one or more of their children to act as executors to their estate. If this is the case, then the decision to sell a family home may therefore be taken by one sibling without the consent of others but only if they are acting as the estate executor.
It is worth remembering that the role of an executor is to act in the best interests of all of the beneficiaries. In this respect, their position can be challenged if you do not believe that they are carrying out their role responsibly. An example of when this is applicable is if the executor accepts an offer on a property that is much lower than the market value simply to facilitate a quick sale.
Lastly, whilst no one sibling can force the sale of a property they can ask a court to order a sale but it is then up the courts to decide whether this is the right course of action. Of course, there are costs associated both with bringing a force of sale order to court and in objecting to this.
Do We Need to Advise the HMRC If We Keep The House?
If you inherit a house which becomes a second property then you are under obligation to inform HMRC which of the two addresses is your primary residence. You must do this within two years from receiving your inheritance.