Are you buying a property with someone? You’re about to enter into joint ownership, but do you know what kind? We’ll help you figure out whether a tenancy in common would suit you.
The Topics Covered in this Article Are Listed Below:
- What Does Tenants in Common Mean?
- Key Features of a Tenancy in Common
- What Is the Difference Between Joint Tenants and Tenants in Common?
- Ownership Percentage Options for Tenants in Common
- How to Change to a Tenants in Common Agreement
- What Are the Disadvanges of Tenancies in Common?
- Deed of Trust for Tenants in Common
- Rights of Tenants in Common
- How to End a Tenants in Common Agreement
- Tax Implications of Tenants in Common
- Want to Know More?
WHAT DOES TENANTS IN COMMON MEAN?
To be tenants in common you must be part of a tenancy in common agreement. A tenancy in common agreement is a situation in which 2 or more people hold interest in a property and each owner has the right to leave their share of the property to a beneficiary upon their death.
This doesn’t mean you own separate parts, but that you have separate interest in the whole property. You can even have different ownership interests - e.g. Jane may own 75% of a property and Jack may own 25%.
The fact that you own separate proportions of interest in a property makes tenancies in common suitable for people who want to purchase a property with friends and family.
Do You Need a Tenants in Common Mortgage?
You don't need a special mortgage to be tenants in common. You simply need a normal mortgage and your solicitor will set up the ownership arrangements.
Key Features of a Tenancy in Common
A tenancy in common allows multiple people to hold an undivided share of a property. Some of the key features of a tenancy in common include the following:
- Co-ownership - a tenancy in common involves 2 or more people who jointly own a property. Each person holds a distinct and separate share of the property
- Separate shares - each co-owner of the property has their own clearly defined share of the property. The shares can vary, depending on a prearranged agreement, or the financial contributions to the property
- Transferability - a co-owner has the right to transfer or sell their share of the property without getting consent from the other co-owners. This means that 1 person under a tenancy in common can sell their share to someone else without affecting the other co-owners' rights or ownership of the property
- Inheritance - if 1 of the co-owners dies, their share of the property can be passed on according to the chosen beneficiary in their will. Their share of the property doesn’t automatically pass to the surviving co-owners
- Liabilities - co-owners under a tenancy in common share responsibilities and costs associated with the property. This includes mortgage repayments, repairs and maintenance. However, the amount they must pay is in proportion to their share of ownership
- Legal protection - a tenancy in common is a legal form of property ownership. Co-owners have legal rights and protections regarding their share of the property and can enforce their rights if necessary
What Is the Difference Between Joint Tenants and Tenants in Common?
Both tenancies in common and joint tenancies are types of joint ownership. They serve a similar purpose, which is to allow people to co-own property. However, the way they’re set up and the rules they follow are slightly different.
How do you and your co-owners decide between becoming joint tenants or tenants in common? It ultimately depends on your situation and who you want to co-own your property with. Carefully consider which option is best for you, or you risk causing problems later.
So, what are the main differences between joint tenants and tenants in common?
- In a tenancy in common, when one of the owners passes away, they can pass their ownership interest onto a beneficiary in their will. You can’t do this with joint tenancy. The title of the property is automatically given to the other surviving owner, regardless of whether you have a will naming someone else. This is called Rights of Survivorship
- Tenants in common can have different percentages of ownership interest in a property, whereas joint tenants each own the whole value of a property - i.e. 100%. This can be particularly useful if one person is putting in a significantly larger deposit than the other
- Joint tenants are registered on the same deed at the same time - it’s one transaction where they act as one party, which is why the property immediately goes to the other owner if one of them dies. On the other hand, not all co-owners need to enter into a tenancy in common at the same time. You can obtain interest in a property years after the other co-owners originally set up the tenancy in common
Those in a joint tenancy or a tenancy in common agreement have to follow a couple of the same rules, including:
- They both need a joint mortgage to secure a jointly owned property – although tenants in common do technically qualify for separate mortgages, most lenders won't offer this option
- All co-owners of a property must agree to sell that property - if not all co-owners agree, one owner can file a partition action to try and force the sale of the property
Ownership Percentage Options for Tenants in Common
For tenants in common agreements, the overall ownership between co-owners adds up to 100%. This is different from joint tenants, where each co-owner owns 100% of the whole property. The breakdown for tenants in common agreements can be any variation - e.g. Cristina could own 50%, Dan could own 25% and Alice could own 25% or they could each own a third at 33.33%.
If no ownership interest breakdown is specified, it’s assumed that all owners have equal shares in the property.
How to Change to a Tenants in Common Agreement
You can change from sole owners to tenants in common via a process called transferring ownership. You can also change from joint tenants to tenants in common.
Changing a Joint Tenancy to a Tenancy in Common
To change a joint tenancy to a tenancy in common, you must implement a “severance of joint tenancy”. This is a legal document that will convert the joint tenancy into a tenancy in common. You’ll also need to apply for a form A restriction which you send to HM Land Registry’s Citizen Centre. Once the severance is completed, each owner will have a separate share of the property.
Changing to a tenancy in common will provide greater flexibility in selling or transferring individual shares in the future as it doesn’t require consent from the other owners.
You don’t need permission from the other owners to change from a joint tenancy to a tenancy in common. If they don’t agree, you:
- Serve a notice of severance on the other owners
- Fill in form SEV to register a restriction or, if you can’t provide any evidence of the severance options listed in form SEV, fill in form RX1 to register a form A restriction
- Send the form and supporting documents to HM Land Registry’s Citizen Centre
- Prepare any supporting documents you may need to include
A solicitor, conveyancer or legal executive can handle the whole process for you. This will incur some cost, but there’s no fee regarding the actual change itself.
When Would You Need to Change?
You may need to change from joint tenants to tenants in common if you divorce or separate from your partner and want to leave your share of the property to someone else.
What Are the Disadvantages of Tenancies in Common?
The way tenancies in common work isn’t for everyone. There are some risks which you should consider before making your choice.
The risks associated with tenancies in common are:
- If a co-owner without a will dies, the property goes through probate. Probate can be time-consuming and expensive
- In the event that one tenant wants to sell the property, but the others don’t, the tenant can file a partition action. This can force the other co-tenants to sell the property
DEED OF TRUST FOR TENANTS IN COMMON
A deed of trust for tenants in common is a legal document that establishes the rights and obligations of owners in a tenancy in common arrangement. It provides the details of the co-ownership arrangement, including the shares held by each owner, their responsibilities and the terms and conditions. The deed of trust includes provisions relating to the distribution of proceeds should the owners sell the property and contributions towards mortgage payments and repairs. It also sets out the process of selling or transferring shares and the inheritance of an owner’s share of the property if they die.
RIGHTS OF TENANTS IN COMMON
Tenants in common have certain rights regarding their ownership, for example:
- Ownership - each tenant in common has a separate share of the property, which they can sell or transfer to whomever they wish without the consent of the other owners
- Possession - tenants in common have the right to possess and use the property, as long as it doesn’t affect the rights of the other owners
- Inheritance - when a tenant in common dies, their share of the property can be passed on according to what they’ve outlined in their will or the laws of intestacy
- Management - each owner has the right to be involved in decisions concerning the property’s management, including maintenance, repairs and financial obligations in proportion to their specific share
- Legal protection - tenants in common have the legal right and protections to enforce their rights and ownership through legal channels if necessary
How to End a Tenants in Common Agreement
There are several ways you can end your tenants in common arrangement:
- Sale - the joint owners agree to sell the property and divide the proceeds based on their ownership shares and/or original deposit amount
- Severance - if the owners cannot come to an agreement, one of them can apply for a court order which involves dividing the property or selling it and distributing the proceeds among the owners
- Buyout - one of the owners can choose to buy out the other owner(s) by buying their shares of the property at an agreed price
However you decide to end your arrangement, it’s essential that you get legal advice to ensure you understand the specific legal requirements and procedures for ending a tenancy in common.
TAX IMPLICATIONS OF TENANTS IN COMMON
It’s important that you consider the tax implications of tenants in common before entering into such an arrangement. These can include the following:
- Capital Gains Tax (CGT) - when a tenant in common sells their share, they may be liable for CGT on any gains they’ve made since acquiring the property. Each owner is responsible for their own CGT liability, which is based on their ownership share
- Inheritance Tax (IHT)- should one of the owners in common pass away, their share of the property may be subject to IHT. However, transfers between civil partners or spouses are usually exempt
- Income Tax on rental income - any rental income generated from a tenancy in common is taxed, based on each owner’s share
Want to Know More?
Tenancies in common allow you to be a joint owner with a little extra independence. Do you want to know more about your mortgage options? Then make an enquiry or call us on 0330 433 2927 and speak to one of our specialist mortgage advisers. We can tell you everything you need to know.