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In English property law, jointly owned property can be held as joint tenants or tenants in common. The way the property is owned affects tax, income allocation, and inheritance.
Joint Tenants
When property is owned as joint tenants, all the owners share the entire property equally—they don’t own specific portions.
- Rental Income: For married couples and civil partners, rental income is automatically split equally, with each being taxed on 50% of the income. If one partner pays tax at a higher rate, this setup might not be tax-efficient, and it cannot be changed. Unmarried owners or those not in a civil partnership can agree to a different income split, so each is taxed on the income they actually receive.
- Capital Gains Tax (CGT): On disposal, the gain is split equally, with each owner taxed on their share. This is the case regardless of marital or partnership status.
- Inheritance: If one owner dies, their share automatically passes to the surviving joint owners. It cannot be passed to children or other beneficiaries through a will. However, the deceased’s share is included in their estate for inheritance tax purposes. For married couples and civil partners, the surviving spouse exemption applies, reducing the inheritance tax burden.
Tenants in Common
Owning property as tenants in common means each owner holds a specific share of the property, which can differ in size.
- Rental Income: For married couples or civil partners, income is split equally unless they elect for a different allocation (using Form 17) that reflects their ownership shares. This is useful for ensuring income is taxed at the lower marginal rate. If necessary, ownership shares can be adjusted through a no gain/no loss transfer between spouses or civil partners, avoiding CGT. Unmarried owners can also agree to different income splits, which will be taxed accordingly.
- Capital Gains Tax (CGT): Spouses and civil partners can adjust ownership shares before selling to minimize CGT on the gain. This strategy is unavailable for joint tenants or unmarried co-owners.
- Inheritance: A tenant in common’s share does not automatically pass to the surviving co-owners. Instead, it is distributed according to their will or intestacy laws if no will exists. This flexibility provides opportunities for inheritance tax planning, such as leaving shares to children or other beneficiaries.
Why Ownership Matters
Deciding between joint tenancy and tenancy in common should reflect your objectives for tax efficiency, income distribution, and inheritance planning. Consulting a tax specialist can provide valuable assistance in structuring ownership to minimize tax liabilities and protect your interests.
Frequently asked questions (FAQs) Ways of Owning Property
1. What’s the main difference between joint tenants and tenants in common?
The key difference lies in ownership and inheritance. Joint tenants share equal ownership of the whole property, and when one dies, their share automatically passes to the surviving owners. Tenants in common own specific shares, which can differ in size, and these shares are passed on according to a will or intestacy rules. This flexibility makes tenants in common a more versatile option for inheritance planning.
2. Can married couples change the income split for a jointly owned property?
If a property is owned as tenants in common, married couples or civil partners can use Form 17 to split rental income based on their ownership shares. This can help lower their tax liability by allowing the partner with the lower tax rate to receive a larger portion of the income. However, if the property is owned as joint tenants, this option for flexible income allocation is not available.
3. How does property ownership affect capital gains tax?
For joint tenants, any gain is split equally when the property is sold, and each owner is taxed on their share. Tenants in common can adjust ownership shares before selling to reduce CGT, but this option is only available to spouses or civil partners. Transfers between them are tax-free under the no gain/no loss rule, allowing for better tax planning.
4. Why is tenancy in common better for inheritance planning?
Tenancy in common allows each owner to leave their share of the property to beneficiaries of their choice through a will. Unlike joint tenancy, where the share automatically goes to surviving co-owners, this provides more flexibility for passing on assets to children or other family members and can help with inheritance tax planning.