Sarah Bradford explains how the way in which joint property is owned can affect the tax outcome.
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 has tax implications. It will also determine what happens when one of the co-owners dies.
Joint tenants
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 the Land Registry.
Spouses and civil partners generally opt to own property together as joint tenants to ensure that it passes to the surviving spouse or civil partner on death, particularly where the property in question is the main residence, 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.
Tenants-in-common
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 (IHT) transferable nil-rate band in October 2007, property was often owned as tenants-in-common to prevent the nil-rate band from 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.
Ownership as tenants-in-common is popular where the joint owners are not in a relationship, such as 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 spouses or civil partners own a property jointly as tenants-in-common, unless otherwise agreed, each will own a 50% share.
Income tax implications
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.
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 or 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 by the spouses or civil partners in unequal shares, which can only be the case 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 or 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 it is not something that can be done retrospectively. Making a Form 17 election may be beneficial where a buy-to-let property is owned jointly and one spouse or 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 joint tenants.
Where the co-owners are not married or in a civil partnership, and the property is owned as tenants-in-common, income is allocated by reference to their ownership shares and each owner is taxed on their share. If the property is owned as joint tenants, income is 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 – they are not constrained by the rules applying to married couples and civil partners. The income will then be taxed in accordance with the agreed split.
Consequently, for unmarried joint owners, the driving force as to how the property is owned is not the income split, but rather what happens to the property after they die.
Capital gains tax implications
For CGT purposes, each owner is taxed on their share of any gain realised on disposal. Where the property is sold at a loss, each owner has their own share of the loss to set against their personal gains.
Where the property is owned as joint tenants, the gain is split equally for tax purposes. Thus, if a buy-to-let property owned by a married couple as joint tenants 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 is split 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 for CGT purposes as for income tax purposes.
Where the underlying beneficial ownership does not give the best CGT result, the couple can change this prior to sale, taking advantage of the ‘no gain/no loss’ rule. This may be desirable to prevent wasting an unused CGT annual exempt amount, to ensure that the gain is taxed at a lower rate of tax, or to utilise capital losses.
Unmarried joint owners do not benefit from the no gain/no loss rules.
Inheritance tax implications
Regardless of whether the property is owned as joint tenants or as tenants-in-common, the deceased’s share forms part of their estate for IHT purposes. However, under the survivorship rules, where a property is owned as joint tenants, it automatically passes to the surviving joint owners on death, regardless of the relationship between the parties. 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 IHT 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) to the extent that it has not already been utilised.
Owning a property as tenants-in-common, so that on the death of the first joint owner their share in the property passes to the children, can be an attractive option to protect that part of the property from being used to fund care costs for the survivor. It can also be a way of ‘future-proofing’ against later IHT bills where property prices are expected to increase faster than any rise in the IHT nil-rate band, which, given that the nil-rate band is frozen until at least April 2028, may well be the case.
Practical tip
When buying a property jointly, it is important to consider the tax implications and what you want to achieve so that the property can be jointly owned in the most beneficial way.
