He who shares, wins – buying residential property


Author: Joe Hobson


Where two or more individuals purchase residential property they have to decide whether they will hold the property as joint tenants or as tenants in common. The purpose of this article is to explain the distinction between these two options, provide some insight into the circumstances in which each may be most appropriate, and highlight some of the issues that need to be taken into consideration.

The fundamentals

Co-ownership

Co-ownership occurs where two or more people own and have a co-existing interest in land or property.

Where co-owners own a property they hold the legal interest in that property on trust for those who are beneficially entitled to it. This is because a trust of land creates a distinction between the legal owners (who are registered as the proprietors of the property at the Land Registry) and those with a beneficial interest in it (who are entitled to occupy, receive the rents, and receive the proceeds of sale arising from that property).

Often the co-owners will hold the property on trust for themselves and will be both the legal and beneficial owners, such as where a married or unmarried couple or a couple in a civil partnership purchase a property together. Where the owners of the property are both the legal and beneficial owners there are two ways in which they can hold the beneficial interest in that property: as joint tenants or as tenants in common.

Joint tenants

As joint tenants, the co-owners would own the whole of the property together in one indivisible share, regardless of the financial contributions each co-owner may have made to the purchase price. One co-owner is not able to exclude the other co-owner from any part of the property and both co-owners must be involved in any dealings with the property.

On the death of one co-owner under a joint tenancy, their interest in the property would automatically pass to the surviving co-owner who would then own all of the property. This is known as the “right of survivorship”.  No action is needed to transfer the property to the surviving co-owner, as they are already absolutely entitled to the legal and beneficial interest and would be free to deal with the property as they saw fit.

Joint tenancies are most often encountered with married or unmarried couples or those in a civil partnership, because it enables them to own the property equally and makes it straightforward to inherit each other’s interest in the property. However, there are circumstances in which a joint tenancy is not appropriate, for example where one co-owner has made a larger contribution to the purchase price of the property or the co-owners do not wish the other to inherit their interest in the property. In these circumstances, co-owners may want to specify that they each own distinct shares in the property and may therefore be better suited to a tenancy in common.

Tenants in common

As tenants in common, the co-owners would own a specified share in the property. Often this is fixed as a percentage at the time that the property is purchased, usually in proportion to the financial contributions of each co-owner, but this does not need to be the case. Each co-owner’s share could be varied according to the financial contributions they make during their ownership of the property by agreement between the co-owners and each co-owner’s share of the property can be passed on to another person either during their lifetime or upon their death.

In the event that the co-owners opted for fixed shares, these may be equal (i.e. 50% each), but they do not have to be and it is up to the co-owners to agree their respective proportions. In either case the size of those shares should be decided at the time that the property is purchased, in case of subsequent dispute, and recorded in a declaration of trust that would determine each co-owner’s entitlement to the proceeds of sale in the event that the property was sold. This does not prevent the co-owners from reviewing their respective shares in the future, for example where one of the co-owners makes a greater financial contribution to the mortgage payments or to the cost of improvements to the property, but ensures that each co-owner is aware of the size of their share at the time that the property is purchased.

On the death of one co-owner under a tenancy in common, their interest in the property would not automatically pass to the surviving co-owner as the right of survivorship does not apply. Instead, the deceased co-owner’s share in the property would become part of their estate and dealt with in accordance with their will or, if they did not have a will, in accordance with the rules of intestacy.
Tenancies in common are most often encountered where couples or individual business partners wish to hold the property in unequal shares or do not wish their share to pass to the other co-owner in the event of their death.

Severance and conversion of tenancies in common

If the co-owners decide to proceed with a joint tenancy they are able to ‘sever’ the ownership of the beneficial interest from a joint tenancy into a tenancy in common. This is possible by four principal means:

  1. written notice served by either co-owner on the other indicating their intention to immediately sever the joining tenancy into a tenancy in common;
  2. a voluntary or involuntary act where one of the co-owners separates their share in the property either voluntarily or involuntarily (e.g. a trustee in bankruptcy being appointed in respect of one co-owner’s share);
  3. mutual agreement between the parties (e.g. both co-owners agreeing to the severance of the joint tenancy either in writing or by oral agreement); or
  4. mutual conduct between the parties where one or both co-owners make it clear to the other that they wish to hold the property as a tenancy in common rather than a joint tenancy (e.g. both parties making wills in an agreed form that purport to distribute their share in the property to another party).

It is also possible for tenants in common to convert their method of ownership into a joint tenancy at a later date by entering into a new declaration of trust and stating that they now hold the property as joint tenants.

Deciding on the form of ownership

In many cases deciding upon the appropriate method of ownership will depend upon the relationship of the parties and the financial contribution that each of them makes, either at the time that the property is purchased or during their period of ownership.

However, an increasing number of property purchases by two or more individuals deviate from the conventional mould and come with added complications concerning the relationship of the parties, their financial contributions, their existing interest in one or more other properties, and their long-term intentions for the property they are purchasing. Whilst there are options to sever a joint tenancy or convert a tenancy in common the procedures for doing so are not always straightforward, particularly where the parties are in dispute or their relationship has broken down, and they often result in unnecessary cost being incurred.

As a result, it is imperative that co-owners consult a property solicitor who is adequately qualified in this area prior to deciding upon the appropriate method of ownership, as careful consideration will need to be given to the merits of each approach in light of the circumstances and, importantly, their tax implications. It is also important to ensure that the chosen method of ownership is kept under continual review in case the circumstances of the co-ownership change.

Current relevance and tax planning

Whilst the subject matter of this article was traditionally of most relevance to married or unmarried couples or those in civil partnerships, it is an area that is becoming of particular importance to both domestic and offshore investors who would conventionally use companies or corporate trust structures to hold residential property.

As outlined in our recent articles ‘The taxation of residential property in the UK’ and ‘UK residential properties held through offshore structures: a call to action’, the taxation of residential property in the UK has changed almost beyond recognition over the past few years.

Whilst in certain situations there are still many benefits to holding residential property in the name of a company, there may now be significant tax implications for doing so in the wrong circumstances. Increased Stamp Duty Land Tax liability, the Annual Tax on Enveloped Dwellings, a greater exposure to Income Tax, and a new Inheritance Tax liability coming into effect in April 2017 mean that the costs associated with the acquisition and holding of residential property by corporate vehicles will not always be the most cost-effective approach.

As a result, it is strongly advisable that parties who would ordinarily use a corporate vehicle for the acquisition and holding of residential property consult a tax and private wealth solicitor who is adequately qualified in this area prior to deciding upon the appropriate method of ownership, to ensure that the most tax-efficient and cost-effective approach is utilised.

Joe Hobson, Associate, Fladgate LLP (jhobson@fladgate.com)

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