Severing a joint tenancy may be easier than you think

4 February 2016

A joint tenancy is a fragile thing. That appears to be the upshot of a case in First Tier Tax Tribunal where the judge was very easily persuaded that a joint tenancy had been severed by notice – even though the notice itself had been lost.

Chadda v HMRC [2014] is particularly interesting because of Judge John Clark’s detailed discussion about the evidence. He seemed to suggest that there was, in fact, almost a presumption in favour of severance. He also concluded that the more probable the event, the less evidence is required.

However, there are important practical lessons for practitioners dealing with estate planning which involves severance of joint tenancies. Prevention is better than a cure and, even though Chadda suggests that the court will readily fill in any gaps, it is, of course, preferable to avoid ending up in front of a judge, if possible.

The facts

The case concerns the estates of James and Mary Tobin who had sought advice from their accountant, Mr Chadda of Kingston Smith, about their IHT planning. In particular, they wanted to make sure their disabled daughter was provided for on their deaths.

In 2003 they executed mirror wills, each with a nil-rate band discretionary trust (this was, of course, prior to the introduction of the transferable nil rate in 2007). At the time the wills were drafted, it was not clear whether they owned their house as joint tenants or tenants in common.

It was apparently agreed that Mr Chadda would check the position and would prepare the severance documentation if necessary. His evidence was that it was discovered that the property was held as joint tenants. He therefore took a notice of severance to his clients’ house, where it was signed by them both.This was a few weeks after the signing of the wills.

On Mr Tobin’s death, there were not enough liquid assets in his estate to constitute the nil-rate band trust – the main asset was the property. The property was transferred to Mrs Tobin’s sole name on the basis that her estate ‘owed’ the value of the nil-rate band (then £255,000) to the trustees. This arrangement could, of course, only work if the joint tenancy had been severed. Otherwise the property would have passed to Mrs Tobin by survivorship. 

Unfortunately, on Mrs Tobin’s death the notice of severance apparently signed in 2003 was nowhere to be found and the severance was not recorded at the Land Registry. It did not help that in Mrs Tobin’s IHT200 and in initial correspondence with HMRC, Kingston Smith stated that the property had passed by survivorship on Mr Tobin’s death.

HMRC sought to argue that the joint tenancy had never been severed. Mrs Tobin died on 27 July 2007, just over two months before the transferable nil-rate band was introduced. Therefore if the tenancy had not been severed, the full value of the property would be included in Mrs Tobin’s estate for IHT and Mr Tobin’s nil-rate band would have been wasted.

In August 2012, after protracted correspondence where Kingston Smith fought their corner, HMRC issued a notice of determination that the full value of the property was to be included in Mrs Tobin’s estate. In February 2013, Mr Chadda and various beneficiaries appealed this decision to the court.

The law

The legislation relating to the severance of joint tenancies can be found in the Law of Property Act 1025, s36, which provides that:

Provided that, where a legal estate (not being settled land) is vested in joint tenants beneficially, and any tenant desires to sever the joint tenancy in equity, he shall give to the other joint tenants a notice in writing of such desire or do such other acts or things as would, in the case of personal estate, have been effectual to sever the tenancy in equity and thereupon the land shall be held in trust on terms which would have been requisite for giving effect to the beneficial interests if there had been an actual severance.

In other words, a joint tenancy can be severed by a written notice or by conduct. In fact, according to the judge in Chadda there are three ways to sever a joint tenancy, all of which occur ‘behind the curtain’ of the legal interest:

  • by notice; 
  • by agreement; or
  • by a course of conduct

The standard of proof required, which no one disagreed about, was on the balance of probabilities and the burden of proof falls on the person seeking to show that the tenancy has been severed – in this case Mr Chadda.

Evidence regarding written notice

Mr Chadda told the court that he had been involved in the Tobins’ affairs since 1983, providing accountancy, business, commercial and personal tax advice. He said that most of his dealings with them were face-to-face as they tended to need a lot of ‘hand-holding’.

In his evidence, he recalled visiting the Tobins’ home in early August 2003 with a notice of severance for them to sign. He said that Mr Tobin had signed first followed by his wife.

Unfortunately, Mr Chadda had not kept an attendance note of the meeting. However, the Tobins’ daughter Eileen gave evidence that she was at the house when Mr Chadda visited. She recalled Mr Chadda and her father conducting their meeting separately before joining her and her mother in the kitchen. Her mother had then signed a ‘one page document’ and expressed her relief that whatever
it was had been dealt with.

When he returned to the office, Mr Chadda said that he had given the signed notice to his colleague Belinda instructing her to send it to the bank. It appears that this did not happen. In his evidence, Mr Chadda produced an email from Belinda in which she said: ‘I have discussed the issue of the signed Tenants in Common agreement with Barclays and they would like it to remain with us’.

However, by the time of the hearing the original document had not been lost and there was no copy on file. A search of the firm’s computer files showed only that the notice had been prepared. It was therefore clear that an agreement had been prepared. It had not been signed but, as counsel for the appellant, Harriet Brown, pointed out, this is not a requirement under s36.

Ms Brown successfully argued that the court could rely on the draft notice of severance, even though there was no signed copy. The court considered the case of Masquerade Music Ltd v Mr Bruce Springsteen [2001], which deals with the admissibility of secondary evidence. This case provides that it is for the court to decide how much weight to place on such evidence taking into account
all the circumstances, including whether there is a good explanation for not having the primary evidence available. In this case, the weight given to the draft notice was considerable as the surrounding circumstances pointed strongly to severance having occurred.

HMRC, she said, seemed to have taken each piece of evidence in turn and dismissed it as being insufficient on its own. This was not the correct approach and events had to be looked at as a whole. The court wholeheartedly agreed.

The more probable something is, the less evidence is required

Ms Brown also successfully argued that if something was inherently probable, less evidence was required to prove it on the balance of probabilities. The court considered this at some length and the judgement contains some interesting discussion on this point. There is only one civil standard of proof – the balance
of probabilities – this is the law. However, the ‘inherent probability’ of something occurring is a matter of pure common sense and must be taken into account.

HMRC argued that there was always a minimum level of proof which must be provided, no matter how probable something is. The court firmly rejected this. The judge concluded that ‘something less improbable requires less evidence’.

Challenges to the evidence

Interestingly, each of HMRC’s challenges to the evidence were given short shrift by the judge and Mr Chadda’s explanations were readily accepted. This is, perhaps, an indication of a readiness by the court to actively try to find that severance has taken place where there is a disagreement.

Counsel for HMRC, Colin Ryder, suggested that the ‘one page document’ signed by the Tobins may in fact have been something else. In particular, he suggested it could well have been a shareholders agreement which Kingston Smith had apparently been assisting Mr Tobin with at about the same time. 
However, Mr Chadda argued that a shareholders agreement would be longer than one page and the court accepted this.

HMRC also challenged Mr Chadda’s evidence as a whole, as he had previously made a statutory declaration that the notice had been sent to Mrs Tobin for signature and then served on Mr Tobin. This was inconsistent with his witness evidence. Mr Chadda explained that the statutory declaration had been drawn up by his staff based on what they had found on the system. He had assumed that it was correct and signed it. When he later put his mind to what had happened over ten years ago, he was able to recall what had actually taken place. Again, the court accepted this. The judge stated that Mr Chadda would not be expected to have an ‘instant recollection’ of event and it was understandable that the process of preparing for the hearing had helped to refresh his memory. Also, the fact that the Tobins required ‘hand holding’ in their dealings with professionals made Mr Chadda’s version of events, ie that he had attended their home, extremely plausible. In fact, the judge considered it ‘unlikely’ that it would have been sent to them for signature.

HMRC argued that the notice was drafted to be given by Mrs Tobin to Mr Tobin, and yet Mr Chadda’s evidence was that Mr Tobin had signed it first. The court said that this simply did not matter. There is no requirement under s36 for the notice to be signed and therefore there cannot be a requirement for it to be signed in a particular order. HMRC also pointed out the inconsistencies in information provided to them on Mrs Tobin’s death. This was explained as being a result of different people working on the matter who were not familiar with the history. Again, the court accepted this.

Finally, HMRC suggested that Mr Chadda’s colleague Belinda’s use of the word ‘issue’ in her email about the purported notice suggested that there was a problem with it. Mr Chadda said that he had not interpreted it that way and, again, he court agreed with him. The judge also pointed to the use of the definite article ‘the signed Tenants in Common agreement’ as opposed to ‘a’ signed agreement.

Judge's conclusion

Although the judgement is long and considered, it does not appear that the judge had any doubts at all about his conclusion. The overall picture, he said, was that Mr and Mrs Tobin had signed a notice of severance and the joint tenancy had therefore been severed.

As a result, Mrs Tobin was not beneficially entitled to the whole of the property at her death and the £255,000 loaned by the nil-rate band trustees was a liability of her estate.

Presumption in favour of severance?

Counsel for the appellant, Harriet Brown, suggested that s36 was in fact very pro-severance and required the court find that where the parties intended to sever their joint tenancy that tenancy was severed. While the judge accepted that there was a ‘preference’ in the law for joint tenants to be able to be severed, his view was that intention by itself is not enough – there must also be some form of action.It is perhaps going too far to describe this as a ‘presumption’ in favour of severance but at the very least, it shows that the extent of evidence required seems to be really very small indeed. This is nothing new. As far back
as mid-nineteenth century the court held in Williams v Hensman [1861] that ‘in general, in the absence of any express direction, a tenancy in common should be the construction adopted’.

Was there also severance by agreement or conduct?

Although the judge came down very firmly on the side of severance by notice, he also considered whether if he was wrong, severance had come about in another way. He considered whether there was a ‘course of conduct’ in relation to the tax and estate planning undertaken by the Tobins as a whole. HMRC had tried to argue that the drafting of wills could only be relevant to the ‘course of conduct’ if they were mutual wills. Again, this was given short shrift – wills need not be mutual. The wills alone were not sufficient to show agreement or a course of conduct – particularly as they made no specific reference to disposing of the property. However, when viewed in the context of the planning as a whole the wills pointed to severance having taken place.

The judge concluded that the evidence as a whole, including the wills and the surrounding circumstances, showed that Mr and Mrs Tobin had severed their joint tenancy by agreement. This was the only way they could achieve what they wanted to achieve. There is no need, said the judge, for any such agreement’ to be in writing. 

In a real ‘belt and braces’ approach, the judge went on to consider whether, if he as wrong about severance having occurred by writing or agreement, it had occurred by course of conduct. He concluded that it had – for the same reasons that he had concluded there had been an agreement.

Lessons for practitioners

Following on from Marley v Rawlings [2014] this is another example of the court taking a very common sense approach and appearing to go out of its way to give effect to the parties’ intentions. Here, the judge was satisfied that he could find that severance had occurred even though there was no actual notice of severance, no attendance note and no restriction on the Land Register.

However, in Chadda Mr and Mrs Tobin were both on the same page. All of the family members agreed about what had happened – it was only HMRC’s involvement which brought the matter to court. If there had been a disagreement between family members then it might have been a different story.

Now that we have the transferable nil-rate band, it is less likely that couples such as the Tobin’s would need to sever their joint tenancy for tax planning. Severance is still very useful where one or more members of a couple have children from a previous marriage. It is very common in such situations for the tenancy to be severed and for the deceased’s share to be held on a life interest trust for the survivor and thereafter to the deceased’s children. In this case, it could be very attractive for the surviving spouse to argue that the property was owned as joint tenants and passed by survivorship.

It is therefore not a good idea to treat Chadda as a message that by doing the bare minimum, everything will probably be all right.

It is also very common for notices of severance to be prepared and not registered with the Land Registry. Chadda is a good example of why
this is not good practice. Even though Mr and Mrs Tobin’s estates were both handled within the same firm, there was initial confusion about how the property passed on the second death. If new firms become involved, it is all too easy to see how a notice of severance prepared several years ago could be missed. Potentially, a firm administering an estate could instruct the Land Registry to remove the deceased from the title using form DJP. This could leave the true beneficiaries in trouble if the surviving spouse chooses to be difficult.

Chadda teaches us that a notice of severance is a very precious document which should be treated with as much care as a will.

This article was first published in Legalease in February 2016.

Further information

For further information, please contact Jim Sawer or any member of our private client team - or visit our Probate and Administration page.

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