Over the years, I have noticed that there is a lot of confusion in matters on how properties should be purchased between two individuals; should the property be purchased on joint names as ’joint tenants’, or ‘tenants in common’ and what are the tax implications if you decide to let the property out? I have tried to provide answers to the most common questions asked on this topic below. At this point, I should also explain the legal terminology as homeowners are usually freeholders or leaseholders, and those who simply rent their property out are referred to as ‘tenants’. However, joint owners of a property are also referred to as ‘tenants’ in legal jargon, when in reality, both are joint freeholders or leaseholders.
Types of Ownerships
There are two ways in which more than one person can own a property, either as:
1. Joint tenants – whereby each is deemed to own an equal share in the property. So, three joint tenants will be entitled to a third share of any capital gains arising from one property. When one owner dies, the property is automatically transferred to the other joint tenants in equal shares, and none can sell their share without the others’ permission. The legal rights of the surviving parties to a joint tenancy override a will, even if they will explicitly leave the deceased’s share to someone else. Whatever the proportions in which the parties have contributed to the purchase price and/or to the maintenance of the property or mortgage payments, the legal presumption is that any proceeds of the sale will be divided equally. To place a house in joint names is to make a gift of any excess contribution to the other party/parties.
2. Tenants in common – where the share of each owner is separate, may be unequal and can be disposed of during the person’s lifetime or on death, as each respective owner wishes.
Two or more unmarried people may own property either as joint tenants or tenants in common, although it is more usual to be held as tenants in common. The default position of property ownership by spouses/civil partners is as joint tenants.
Joint tenancy ownership can be changed into a tenancy in common at a later, but a tenancy in common cannot be changed into a joint tenancy.
For a property owned by unmarried parties or held within a business partnership, the tax follows the beneficial ownership (which owner paid the greater deposit, took out the bigger loan for the purchase, made the bigger mortgage payments etc.) rather than legal ownership (the name on the legal documentation including the deeds).
If the property in question has been let out, this does not mean that the rental profit or loss must be allocated in the same proportion as the underlying beneficial ownership. Rather, the owners can agree on a different split of the rental income as they see fit. The proportion refers to profit and loss only and not necessarily to the capital received should the property be sold. Form 17 of HMRC is irrelevant to unmarried owners of joint property, however held.
Married owners – the point of form 17
By default, tax law (s836 ITA 2007) holds that rental profit from property jointly owned by spouses/civil partners is taxed 50:50 irrespective of the underlying respective proportion of actual ownership – although this does not apply to property held within a business partnership proper. Again, it is a misconception that all that must be done is to submit a Form 17 to HMRC, and the profit is taxed at a different split to the default 50:50.
If it would be more efficient for income tax purposes to split the profit differently, then the profit may be divided according to that beneficial ownership. Such unequal ownership is achieved only as tenants in common, and it is then that a form 17 becomes relevant. Form 17 must be signed jointly – if one spouse/civil partner does not sign, then both must accept the standard 50:50 default split. The form is also only applied between two married/civil partners living together.
Once HMRC has been notified, the new proportions remain in force until the couple’s beneficial interests in the property change or one spouse/civil partner dies or they stop living together as a married couple/civil partners. The form must be submitted within 60 days of the date of the declaration and cannot be backdated, the time limit being strictly enforced with no power of extension.
The importance of a declaration of trust
The specified share of a property held as tenants in common is not shown on the title deeds of the property, so how much each individual owns and under what terms is recorded in a formal document known as a “declaration of trust”. The declaration of trust is then signed by all parties and recorded on the property register at the Land Registry. Evidence of the property being held jointly in unequal shares must be submitted to HMRC with Form 17. The strongest evidence is a declaration of trust which costs in the region of £300 to obtain from a solicitor.
The proportion as per the Form 17 submission continues for all later years, and there is no limit to the number of times a form can be submitted. But the revised proportions can only be changed specific to the events given above. The smallest change of interest cancels the declaration, with the tax split automatically defaulting to the standard 50:50 unless a fresh declaration is made. Therefore, the change needs only to be 1% in ownership in order to arrange a different tax split, which may be necessary depending upon the respective tax rates of the owners.
It is suggested that whenever a married couple purchases a property together, they do so as tenants in common and sign a declaration of trust. They can then submit a Form 17 election even if the 50:50 tax split is to be used, the reason being that once the election is made, it can be changed whenever required; without it, nothing can be done.
Form 17 is not required where the property is a furnished holiday let.
Capital Gains position for a rented-out property.
Regardless of how the rental income is treated for income tax purposes, it is the underlying beneficial ownership that determines the capital gains tax treatment if the property is sold. Therefore, the allocation must ensure that the full CGT allowance can be used by each owner. This may not be the case for a married couple who had originally chosen, say, a 90:10 split; therefore, the declaration will need to be revised, preferably a few months prior to the actual sale of the property, which should give HMRC sufficient time to record the required changes.
A transfer of beneficial interest from one spouse to another is a CGT disposal. Although unlikely to trigger a gain by virtue of the ‘no gain/ no loss’ rules, there may be consequences when the property is finally sold.
For further information or if you have any specific questions on property tax, please email me, Akshay Shah, at [email protected] or contact ACE Accounts and Tax on 01908 018360