Joint Tenants:
If you own your home as joint tenants, then you both own 100% of the property. When one partner dies, the other automatically becomes the sole owner.
Tenants in Common:
If you are tenants in common, then you both own shares of the property, which can be equal or unequal. Respectively, it could be 50/50, 75/25, 60/40 and so on. When one partner dies, their share automatically goes to their beneficiary as specified in their will – or if a will has not been made – in accordance with the rules of intestacy (i.e. where someone dies without a will).
So which option should you choose?
This is entirely up to you and your circumstances. Joint tenancy is usually preferred by married couples where the intention is that the property will be passed automatically to the surviving spouse if the other dies. However, in order to sell the property, you need the other owner’s permission which can be difficult in futile relationships.
Tenants in common on the other hand is perhaps more convenient for unmarried couples, remarried couples, parents and children, brothers and sisters, friends and so on. It allows you to leave your share to a beneficiary other than the surviving owner and you do not need permission from the other owners to sell your share.
Inheritance Tax:
Where tenancy in common trumps joint tenancy is through Inheritance Tax (IHT). This tax does not need to be paid on assets transferred between husband and wife, however, when the second spouse dies, the property needs to go somewhere, and usually it’s to the children. The individual IHT threshold is £325,000 and anything above this amount will include a hefty 40% tax bill.
Married couples and civil partners are able to pass their personal IHT thresholds to their spouse upon death, meaning that the surviving partner can bequeath assets worth up to £650,000 tax-free.
For those not married, ‘tenants in common’ is beneficial if your share is less than £325,000, as you will avoid IHT when your share passes to your beneficiary. If you are unmarried and joint tenants, then when the property is passed on to your beneficiary, they will need to pay IHT if the whole property is valued at more than £325,000.
Debts
The advantages of tenants in common go even further. If for example, your spouse has outstanding debts upon their death, these will need to be paid out of their estate before assets can be passed to any beneficiaries stated in their will.
If you own your property as joint tenants, your partner’s share will be passed automatically to you on their death. This means that their half now becomes part of your estate and creditors can apply for an ‘Insolvency Administration Order’ within five years of the death, which can force a sale of your home in order to pay the outstanding debts.
If you are tenants in common, then it is far easier to pay outstanding debts through the deceased’s separate share, rather than as joint tenants, where, upon their death, you will own the entire property, which may force a sale. You are not immune, though, and if the deceased’s assets and shares cannot pay the entire debt, then creditors could still force a portioned or full sale of the property.
Stamp Duty Land Tax
Stamp Duty Land Tax (SDLT) is not payable if a property is owned in equal shares however, if as tenants in common, your shares are not equal and one person wants to buy the others out, then they will have to pay SDLT if the amount paid is over the threshold.
Residential land or property SDLT rates and thresholds:
|
Purchase price/lease premium or transfer value |
SDLT rate |
SDLT rate for first-time buyers |
| Up to £125,000 | Zero | Zero |
| Over £125,000 to £250,000 | 1% | Zero |
| Over £250,000 to £500,000 | 3% | 3% |
| Over £500,000 to £1 million | 4% | 4% |
| Over £1 million | 5% | 5% |
SDLT is also applicable if, as tenants in common, one or more of the shareholders wishes to change their percentage of ownership, if the amount is above the threshold.
Example
John Smith and Jack Brown own a farm jointly in equal shares. It’s valued at £2 million. They decide to split the ownership of the farm geographically and each takes 50 per cent of the land.
If the value of each half of the land is the same, then no SDLT is due.
However, if the land taken by John Smith happens to include the farmhouse and farm buildings, John’s land is valued at £500,000 more than the land that Jack Brown takes. The shares are:
- John Smith – £1,250,000
- Jack Brown – £750,000
John decides to compensate Jack by paying him £250,000 to make things fair. SDLT is payable on this £250,000 because it’s more than the current threshold.
It is, therefore, wise when first setting up a tenancy in common, that all parties are happy with their shares in the first instance as changes can be costly.
Contact us for further details:
Phone: 020 7354 3914
Email
No comments yet.