Joint Tenants vs Tenants in Common – Why does it matter?

Firstly, ignore the ‘tenant’ bit, legal terms are steeped in history and sometimes irrelevant to the modern world. In this context Tenant = Owner.

Joint Tenants

Where property is owned as joint tenants, they both own all the property equally. They both own the whole rather than a particular share. Each of you jointly owns 100%. This is by far the most common way for married couples and civil partners to own property. If one person dies, the ownership automatically passes to the other person.

Tenants in Common

With this option, each joint owner owns a specified share of the property. That share is theirs to do as they wish. On death, it does not automatically pass to the other owner,  but is distributed according to their will.

This type of ownership is popular with friends or siblings buying a property together. However, there are also benefits for married couples as we shall see.

Tax Implications

For rental income purposes, the income for married couples will ALWAYS default to 50/50 regardless of how the property is owned. This may not be ideal where one person is a higher rate taxpayer and the other is basic rate for example.

In order to split the income to something other than 50/50, the property MUST be owned as Tenants in Common. This is done by a deed and we’d generally advise using a solicitor to achieve this. Once the ownership type is changed the ownership split can be changed to the most beneficial arrangement, for example 80/20. In normal circumstances transferral of property in this manner would possibly bring an exposure to Capital Gains Tax. For married couples however, property transfer is on a no gain/loss basis, which means you can achieve the desired split at minimal cost.

Now we have our tenancy changed and our beneficial ownership split, we just need to tell HMRC that we will be using this as the basis for splitting our property income. This is done via Form 17 and only needs to be submitted once. It’s not retrospective however and only applies once HMRC have approved it.

The beneficial ownership split not only applies to income tax, any Capital Gains Tax on selling the property will also be affected. This is an important tax planning point. Ensuring the ownership split makes the most effective use of each owner’s tax allowances takes forward planning.

The optimum ownership structure for an investment property will always be different to your private residence. Getting it right will save you tax every month and avoid losing out on valuable allowances in the future.

Get in touch for more information or speak to us for bespoke advice on tax planning for any exit strategy.