The perils of co-ownership
Buying a property with someone else is an investment for the future. As with any investment, every purchaser should want to know who owns what when their investment is realised. That is dictated by how the property is held.
In my experience prospective joint purchasers do not always think about their needs before entering into a purchase. Decisions are most likely taken either in the warm glow of a belief in a long-lasting future together or with trust in a future where individual ambitions continue always to converge.
Unfortunately, the real world has a habit of intruding into the narrative and the promise of the present isn’t always matched by the reality of the future. The resulting conflict can be made more acrimonious where expectations on the fruits of the investment are disappointed due to the wrong choices on legal ownership being made.
It is therefore critical that a purchaser defines his or her needs before entering into a joint property purchase so that the correct legal solution can be applied.
What do you need to know?
Firstly, that there are only two ways co-owners can hold property. These are:
- As joint tenants,
- Or as tenants in common.
The consequence of each is very different, as summarised below.
Spouses marrying for the first time will generally choose to hold property as joint tenants. The significance is that where property is held this way none of the co-owners have a specified share in it. Each owner owns all of it. So on the death of one co-owner, his or her interest in the property will automatically pass to the survivor and will do so regardless of the provisions of the deceased's Will. The survivor will own all the property and on the survivors's death it will form part of his or her estate.
There may be a number of reasons why this would not be appropriate. For example, one co-owner may make a larger contribution to the purchase price of the property and wants this to be recognised if the property is either sold or if the co-owners separate. A joint tenancy would also not be suitable where one or both co-owners have children from an earlier relationship and they wish to leave a share in the property to them.
Tenants in common
This is generally used when the purchasers are not romantically linked or in the case of a subsequent marriage, particularly if as indicated above, where there are children from the former marriage. It is likely to be a better choice if you are concerned about protecting your assets and/or inheritance tax planning.
Here each co-owner will own a specified share in the property. Shares can be fixed from the date of the purchase (e.g. 50/50) or vary according to the financial contributions made by each person during their ownership of the property. This may be appropriate if one party is to make a larger contribution towards the repayment of the mortgage or is to fund improvement works to the property.
Each co-owner's share in the property can be passed to another person, either during their lifetime or under their Will. Intestacy rules apply if there is no Will.
A declaration of trust is recommended. This document records the co-owners' respective shares and determines who gets what when the property is sold, or if the co-owners separate.
It is also advisable for co-owners to have a Will in place to control what happens to their respective share in the property on death. This is particularly important if the deceased co-owner wants the surviving co-owner to remain in the property whilst they remain alive. The Will can stipulate that the survivor has the benefit of a life interest in the deceased's share to enable this. On the survivor's death the deceased's share will pass to his/her children. A life interest trust is unlikely to be fully effective unless the property is owned as tenants in common and it is always prudent to consider reviewing any existing Will when purchasing a replacement or additional property.
When purchasing a property jointly with another, it is vital to understand the full implications and details from a legal perspective before entering into the agreement. Circumstances can change and if they do, it is possible to convert a joint tenancy to a tenancy in common or vice versa.