Joint property ownership–the risk and rewards

In particular we ask about any assets that are owned jointly with another person. Typically the assets we hear about are the family home, properties that are being rented out, and bank accounts. The purpose of this article is to draw your attention to why is it so important to consider the assets you own jointly when thinking about your estate, the paperwork you have or need to have in place and the impact of owning assets together with others.

I am going to provide you with details of the fictitious case of Rose. Rose has come to see me to discuss her will. Rose tells me that she owns a cottage with her sister Katie (Willow Cottage).

Katie and Rose rent the cottage out and receive the income. Rose and her partner Joe have bought a house together (Gleneagle Lodge) and each contributed equally to the purchase price. Rose and Joe are engaged to be married later on this year. I am not advising Joe in connection with his will but I will ensure that Rose’s will is made in contemplation of her future marriage to Joe (so that it is not automatically revoked when they exchange vows). Rose tells me she is a basic rate taxpayer.

I recommend to Rose that we download copies of the official title register for 1 Willow Cottage and Gleneagle Lodge to check how the property ownership is reflected.

The title for Willow Cottage shows that Rose and Katie own this property as tenants in common. I explain to Rose that this means that on her death, her share of the property will form part of her estate and will follow the terms of her will. If Rose wants to leave her share to Katie she will need to carve this out as a gift to Katie in her will – it will not pass to Katie automatically. Even if the wedding to Joe goes ahead (as all other assets passing to Joe would be ‘spouse exempt’), Inheritance Tax may be due on Rose’s death if the value of the share of the property passing to Katie is more than Rose’s available nil-rate band (currently £325,000).

If the gift of Rose’s share of Willow Cottage to Katie is made ‘subject to Inheritance Tax’ then Katie  has to find the money to pay the tax (otherwise she may need to sell Willow Cottage). Alternatively if the gift is made ‘free of Inheritance Tax’ then Rose ’s estate will have to find the money to pay the tax. If Rose leaves everything to Joe he could become the joint owner of Willow Cottage or ask Katie  to buy him out. Alternatively Rose could consider speaking to an Independent Financial Advisor regarding a life insurance property to cover the Inheritance Tax on a gift to Katie, and the balance of any outstanding mortgage.

I ask Rose if she has a copy of any Declaration of Trust that she and Katie may have signed when they bought the property. This document indicates the contributions made to the initial purchase price of the property and helps to determine the shares owned by each co-owner. Rose tells me that she does not remember signing a declaration of trust and so in that case I advise Rose that the default position is that they are deemed to own the property in 50/50 shares. Rose says that she thinks she contributed more to the purchase price.

I suggest to Rose that she takes advice from our family department to record the contributions made and shares of the property owned by her and Katie (Katie will need to be advised separately by another firm) in a declaration of trust deed. Rose takes my advice and books an appointment with my colleagues, a declaration of trust deed is produced and signed by both parties revealing that Rose has a 60% share and Katie has a 40% share of Willow Cottage.

I advise Rose that on her death her executors must value her share of Willow Cottage. Her executors will need to make full enquiries to identify the circumstances in which Willow Cottage was held jointly by Rose and Katie with reference to the declaration of trust deed and any updating documents. HMRC recognises the difficulty in selling a share of a property, in this case a 60% share and so its value for Inheritance Tax purposes may be discounted depending on the circumstances. The discount has to be applied for in the Inheritance Tax return and is normally in the region of 10%-15%. HMRC has to agree this and so may ask for further information.

The title for Gleneagle Lodge shows that Rose and Joe own the property as joint tenants. This means that on Rose’s death Joe will automatically be entitled to all of the property even if Rose  left her entire estate to a charity or another beneficiary. If Rose and Joe marry then all assets passing to Joe are exempt from Inheritance Tax. If they do not marry by the time of Rose’s death, then assets passing to Joe are chargeable to Inheritance Tax.

Rose tells me that she and Katie are thinking of selling Willow Cottage. She confirms that her principal private residence is Gleneagle Lodge (she has never lived in Willow Cottage) and therefore she understands that Capital Gains Tax (CGT) will be assessed on her (and Katie) if they sell the property. Capital Gains Tax is a complicated area and so I advise Rose to seek the advice of an accountant as when selling residential property at a gain the taxpayer has 60 days from the date of completion to submit a special in-year tax return to HMRC, followed by payment of the tax due. In the case of second properties, I explain to Rose that as a basic rate taxpayer, special rules for owners of second properties mean that she will pay 18% CGT on any gain she makes on selling her share of Willow Cottage, after deduction of her available annual allowance.

There are also risks of joint ownership for both (1) Rose and Katie and (2) Rose and Joe. This can include in both cases the death of one of the owners, a disagreement between the owners (one party wants to sell but the other does not), relationship breakdown, divorce and bankruptcy of any of the owners. For example, if any of Katie, Rose or Joe are declared bankrupt then their trustee in bankruptcy may need to place a charge over the property in connection with their share.

While not wishing to be the bearer of doom and gloom in relation to joint property ownership, it remains to be said that owning property with family members, friends, partners and spouses can be an overwhelmingly positive and enriching experience. However thinking ahead about what can go wrong and getting your ducks in a row, will save heartache and headaches later on.