Date posted: 9th Dec 2024
Under English property law, there are two ways in which property can be owned jointly – as joint tenants and as tenants in common.
The way in which the property is held can have tax consequences. It also determines what happens if one of the joint owners dies.
Joint tenants
Where a property is owned as joint tenants, the spouses together own all of the property equally – together they own the whole rather than each owning a specified share.
The income is deemed to accrue in equal shares and each spouse/civil partner will be taxed on 50% of the income. This may not be the most tax efficient split where the spouses pay tax at different marginal rates, but where the property is held as joint tenants, unfortunately, this cannot be changed.
For capital gains tax purposes, each joint owner is treated as having an equal share of the property and any gain on disposal is split evenly between the owners, with each being taxed on their share of the gain.
Where a jointly owned property is owned as joint tenants, if one joint owner dies, their share automatically passes to the surviving joint owners – they cannot leave it in their will to their children or other beneficiaries, for example. The deceased’s share will form part of their estate at death. However, the surviving spouse exemption will apply and the transfer of the property between spouse’s, on first death, should not be subject to inheritance tax.
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. This can be helpful from a tax planning perspective.
Where the property is let, the default position for property owned jointly by spouses and civil partners is that it accrues to them equally. However, where the property is held as tenants in common and the underlying beneficial ownership is other than 50:50, they can elect (on HMRC form 17) for the income to be split by reference to their underlying shares. This can be useful to ensure that the income is taxed at the lowest possible marginal rate. Where necessary, the beneficial ownership can be changed by making a transfer from one spouse/civil partner to the other. This can be done without triggering a capital gains tax liability as transfers between spouses and civil partners are deemed to be done on a no gain/no loss basis (although care is needed in relation to SDLT if there is a mortgage on the property).
On death, where a property is owned as tenants in common, the joint owner’s share will be passed on in accordance with their will or under the intestacy provisions if they die intestate – it does not automatically pass to the surviving joint owners. This provides scope for inheritance tax planning.
As property tax experts, we can help guide you around any tax issues on property ownership. Contact us here.
