One of the first questions a conveyancing solicitor asks a home buyer is whether they want to be joint tenants or tenants in common.
In legal terms, how the property is owned is a cornerstone of tax planning.
Joint tenants own the property in equal shares – and as a British property can have up to four individual owners, that’s a 25%, 33% or 50% holding each.
For income tax on rents and capital gains tax on disposal, the amounts are split according to the shareholdings.
On the death of a joint tenant, their share in the property is automatically inherited by the other joint tenants.
If one joint tenant is a higher rate taxpayer and the other a basic rate taxpayer with some of their 20% tax allowance free, switching part of the higher rate taxpayer’s share to the basic rate owner is a standard tax ploy.
This is carried out by asking a lawyer to draft a declaration of trust allocating a specific percentage share in the property to each joint tenant. Then, a HM Revenue & Customs (HMRC) Form 17 is completed and filed with the declaration.
Providing the form is filed within 60 days of signing by all joint tenants, the rental profits and sale proceeds are then split according to the percentages laid out in the declaration.
This shifts some of all the profits paid at 40% by the higher rate taxpayer to the basic rate taxpayer, halving the tax liability.
The optimum time to file the form with HMRC is by June 5, as that is 60 days into the tax year and allows the new percentage split to take place for the whole tax year.
Joint tenants can file as many Form 17 as often as they wish to manipulate the tax they pay – and the form can also be used to split other assets.
Tenants in common own a specific share in the property – anything from 1% up providing the total shareholding of all the tenants in common adds up to 100%.
Tax on rents and disposal proceeds is also split according to these shareholdings.
But on the death of a tenant in common, their share of the property is inherited by the beneficiary or beneficiaries named in their will or goes to their nearest family if they die intestate (without a will).