Sarah Bradford looks at different ways in which property can be owned jointly and the associated tax implications.
Under English property law, there are two ways in which property can be owned jointly; as joint tenants or tenants-in-common. The way in which jointly-held property is owned will dictate what happens when one of the co-owners dies. There are also tax implications to consider.
Where a property is owned as joint tenants, the owners together own all the property equally; together they own the whole, rather than each owning a specified share. All joint owners will have their names on the deeds, but if one of the co-owners dies, ownership passes to the other joint owners. The deeds are changed to the names of the surviving co-owner or owners once a death certificate has been provided to Land Registry.
Spouses and civil partners generally opt to own property together as joint tenants to ensure it passes to the surviving spouse or civil partner on death; particularly where the property in question is the main residence in order to provide security to the surviving spouse or partner that they will not need to leave their home following their partner’s death.
However, from a tax perspective, this is not always the best option, particularly in relation to an investment property where this is let out to provide an income.
The other option for owning property jointly is as tenants-in-common. Where this route is taken, each joint owner owns a specified share of the property. That share is theirs to do with what they choose. On death, their share is distributed in accordance with their will; it does not pass automatically to the other joint owners.
Prior to the introduction of the inheritance tax transferable nil rate band, property was often owned as tenants-in-common to prevent the nil rate band being wasted on the death of the first spouse or civil partner, by passing the deceased’s share to the children rather than the surviving spouse. Property purchased jointly prior to October 2007 by spouses and civil partners may be owned as tenants-in-common for this reason.
Ownership as tenants-in-common is popular where the joint owners are not in a relationship (e.g. if a group of friends buy a property together). However, it can also be beneficial for married couples and civil partners to own property as tenants-in-common, rather than as joint tenants, as it allows for an element of flexibility when tax planning which is not available where a property is owned as joint tenants.
Where property is owned as tenants-in-common and the ownership shares are not specified, the owners are deemed to own the property in equal shares. Therefore, where spouse or civil partners own a property jointly as tenants-in-common, unless otherwise agreed each will own a 50% share.
When deciding whether a jointly-owned property should be owned as tenants-in-common or as joint tenants, the tax implications should also be considered.
(a) Income tax
For income tax purposes, the income split for tax purposes depends on whether the owners are married or in a civil partnership rather than, in the first instance, whether the property is owned as joint tenants or as tenants-in-common. However, owning the property as tenants-in-common offers options where a 50:50 split is not the ideal.
Income from property owned jointly by spouses and civil partners is deemed to accrue in equal shares, irrespective of whether the property is owned as joint tenants or as tenants-in-common. This will not always give the best outcome from a tax perspective; a lower combined tax bill will result if the spouse/civil partner with the lowest marginal rate of tax is taxed on the lion’s share of the income.
To secure anything other than a 50:50 split is only possible if the property is owned in unequal shares, and this is only possible if the property is owned as tenants-in-common; property owned as joint tenants can only ever be owned equally.
Where property is owned in unequal shares, the spouses/civil partners can jointly elect for the income to be split in accordance with their actual ownership shares by making an election on Form 17. The election only takes effect from the date it is made, so is not something that can be done retrospectively. This may be beneficial where a buy-to-let property is owned jointly and one spouse/civil partner pays tax at the basic rate and the other at the higher rate to ensure that as much rental income as possible is taxed at 20%, rather than at 40%.
Spouses and civil partners can take advantage of the capital gains tax (CGT) rule that allows them to transfer property between them at a value that gives rise to neither a gain nor a loss in order to effect the preferred beneficial ownership to support a Form 17 election.
Where an uneven split is beneficial, spouses and civil partners should consider owning buy-to-let properties as tenants-in-common, as this offers tax planning opportunities that are not available when property is owned as tenants-in-common.
Where the co-owners are not married or in a civil partnership, and the property is owned as tenants- in-common, it is allocated by reference to their ownership shares and each owner is taxed on their share. If the property is owned as joint tenants, it will be allocated equally in the absence of an agreement to the contrary. However, joint owners who are not married to each other or in a civil partnership have the option of agreeing between them how they want the income to be allocated. The income will then be taxed in accordance with the agreed split.
(b) Capital gains tax
For CGT purposes, each owner is taxed on their share of the gain. Where the property is owned as joint tenants, the gain is split equally. Thus, if a buy-to-let property owned by a married couple as tenants-in-common is sold, each spouse would be taxed on 50% of the gain. For unmarried couples, the gain would also arise evenly.
Where the property is owned as tenants-in-common, the gain arises in relation to the beneficial shares. This is the case regardless of whether the owners are married or in a civil partnership; there is no deemed 50:50 split as for income tax purposes. However, where the current underlying beneficial ownership does not give the best result for CGT purposes, the couple can change this prior to sale, taking advantage of the no gain/no loss rules. This may be desirable to prevent wasting an unused annual exempt amount or to ensure that the gain is taxed at a lower rate of tax.
(c) Inheritance tax
Regardless of whether the property is owned as joint tenants or as tenants-in-common, the deceased share forms part of their estate. However, under the survivorship rules, where a property is owned as joint tenants it automatically passes to the surviving joint owners on death. Thus, where a property is owned by spouses or civil partners as joint tenants, it will automatically pass to the surviving spouse or civil partner on death and benefit from the spouse exemption.
By contrast, where property is owned as tenants-in-common, the deceased’s share will pass in accordance with their will (or under intestacy laws where there is no will). If it is left to the surviving spouse, it will benefit from the spouse exemption. Where it is left to a beneficiary other than a spouse or civil partner, the nil rate band will be available (as will the residence nil rate band where the main residence is left to children or other direct descendants). This can be an attractive option to shelter the property against care costs, or where property prices are expected to increase faster than any rise in the nil rate band.
When buying property jointly, take into account the tax implications when deciding whether to own the property as joint tenants or as tenants-in-common.