In today’s article, you will learn about how the relationship between joint owners of property affects tax.
(3 minute read)
We will cover:
- The different types of joint ownership and how they affect tax
- What are joint property elections and how you can benefit
Relationship between owners
The relationship between joint owners affects Income Tax, Capital Gains Tax and Inheritance Tax.
HMRC taxes joint owners according to their relationship, so it’s important to consider whether owners benefit or not from their current ownership status.
The most common situation of joint ownership is when owners are in a civil partnership or married.
In the UK, when couples jointly own a property, they are treated as owning equal shares.
With joint unmarried owners, they are taxed according to their beneficial ownership. In other words, they are taxed according to their share in the property.
Different types of joint ownership
One person can be both the legal and beneficial owner of the property.
It can also be the case that the legal and beneficial owners are separate, such as when a legal owner (a trustee) may hold property in the name of a beneficial owner (trust).
Furthermore, there are two forms of joint ownership:
- Tenants in common
- Joint tenants
These affect what happens in probate and affect payment of Inheritance Tax (IHT). Let’s look at each situation more closely.
1. Tenants in common
In this form of ownership, each owner holds a share of the property.
On death, that share might be passed from one to the other.
2. Joint tenants
In turn, this form of ownership, each person has an interest in the property, but does not have any shares.
In this situation, the joint owner cannot mortgage their interest in their property. If one of the joint owners dies, the property is passed directly to the surviving joint tenant irrespective of what the will says.
In summary, the different forms of land and property joint ownership have different treatment in the case of a passing of one of the owners, thus affecting the amount of Inheritance Tax payable.
Important factors to consider in joint ownership of property
It is important to consider that a person is taxed on any income or capital they make from their beneficial interest in property.
Joint property elections make clear what is the relationship between owners and this affects how much tax they pay.
If the joint owners let out property, special rules apply to determine how the tax is allocated between couples — but only where the actual ownership shares are unequal.
In this scenario, both parties can elect for the rental income to be taxed according to their beneficial ownership. This is a joint property election.
To make joint property elections, owners must fill Form 17 to HMRC.
In some situations, this can be beneficial. For example, married couples and civil partners who are joint owners must make a joint property election to HMRC, which avoids them paying 50/50 in tax.
Note that this can only be done when spouses or civil partners own the let property as tenants in common.
When jointly owned property is in a single name, HMRC may ask for a declaration of trust, to confirm that there is a joint beneficial interest.
In the absence of a Form 17 election, HMRC sees income as arising equally (50/50).
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