What is Tenancy in Common?
Finance journalist Steve Sims explains what tenancy in common is and how it affects landlords. Read more here.
Tenancy in common is one way to own a property with another person, including homes you rent out. The other option is a joint tenancy.
Choosing how you formally own a property with others affects the tax you pay on rental profits and capital gains. It also influences what happens to the property if another owner dies or your relationship with them breaks down.
You can own any property, including your own home, letting property, second homes and furnished holiday lets, as tenants in common.
What is a joint tenancy?
What is a tenants in common agreement?
What is severance of joint tenancy and what is does it involve?
Joint tenants in common: what does this mean for landlords?
What is right of survivorship?
Joint tenants have an equal say in decisions about the property. If one dies, their share of the property is automatically inherited by the other joint tenants.
This is the law even if one of the joint tenants wills their share in a property to someone who isn’t already a joint tenant.
For landlords, HM Revenue & Customs (HMRC) assumes that spouses or civil partners who jointly own a letting property will split the rental profits and gains 50:50.
If you have a joint tenancy, you can still change the shares each owner has in a property by income shifting or switching to a tenancy in common.
You can check out if you’re a joint tenant or tenant in common by looking at legal documents. For example, you can find out by looking at the conveyancing documents drafted when you acquired a property, a lease or a declaration of trust agreed between you and other owners.
A tenants in common agreement is often considered a more flexible way to own letting property than a joint tenancy. However the flexibility comes with some pitfalls that need careful consideration.
The agreement allows owners to:
- Add their share of a property to anyone they wish via a will. This could lead to problems if the relationship between the owners breaks down, if the person who takes over the share wants to sell, or if they are difficult to work with or someone you don’t trust.
- Split ownership of a property into unequal shares. These shares can range from 1% to 99% as long as the total shareholding comes to 100%. Don’t forget that when you transfer a share in a property, you lose control of that share for good.
- Save tax by altering their shares of ownership. This would allow them to give an owner paying tax at a lower rate than another a larger share of the rental profits and gains.
Severance of a joint tenancy is the formal way to switch from owning a property as joint tenants to owning it as tenants in common.
The severance is drawing up a legal document, sometimes called a deed of severance, which changes the way you own a property, but not necessarily the share you own unless you stipulate any changes in this document.
The effect is instead of jointly owning an entire property; each owner has a distinct share they personally own rather than general ownership of the entire property.
Ask for the advice of a lawyer to draft the deed to make sure your intentions are clearly communicated and the resulting changes match your intentions.
The deed should be filed with the Land Registry or kept with the title deeds so anyone looking at the title can clearly see who and how the property is owned.
Landlords owning a rental property through a tenancy in common can gain some tax and financial advantages:
Income shifting is a perfectly legal and effective tax saving strategy for married couples and civil partners.
Tax law allows spouses and civil partners to exchange ownership of assets, including property, as they wish without incurring capital gains tax (CGT).
If unmarried couples transfer a share in ownership of a home, this triggers CGT, but if a married couple or civil partners do so, they don’t pay the tax.
This allows landlord couples to income shift if one pays taxes at a lower rate than the other. By changing the shares they own in the property from 50:50 to give the lower rate taxpayer a larger share of ownership, any rental profits or capital gains are also taxed pro rata that share of ownership.
A point to watch is if the rental property is mortgaged, the transfer of ownership may trigger a Stamp Duty Land Tax charge.
To income shift as tenants in common, ask a lawyer to draft a declaration of trust and complete an HMRC Form 17. File the form with your tax office and HMRC will tax rental profits and gains in line with the shareholdings on the documents.
You can change the shares of ownership at any time by filing another declaration of trust and Form 17.
To income shift as joint tenants, you first need a severance of tenancy.
Responsibility for own tax
Even though a property may have several owners, each owner has their own responsibility to keep financial records and submit information about rental profits, losses and gains on their annual self-assessment tax return.
Owning property as tenants in common is often an important part of making a will and estate planning.
If you own a property other than your home with someone else, regardless of whether you’re married or civil partners, a local authority can generally only demand care costs up to the value of their specific share in the property as a tenant in common.
This is a specialised and complicated inheritance tax advice topic, so you should discuss your options with a suitably qualified professional.
The right of survivorship only applies to a joint tenancy. Under this right, the one joint owner automatically inherits the share of the other when they die. If the property has more than two joint tenants, the share is split equally among them.
Tenancy in common - summary
Considering switching from owning a home or rental property from a joint tenancy to a tenancy in common can offer tax saving opportunities, but only proceed after taking professional advice to make sure the results match your intentions.