Tenants in common means that two people own a proportion of a property each as opposed to owning the whole property together. This might sound confusing, but it’s an increasingly common model that has arisen due to the multiple ways people can buy new homes.
What is tenants in common?
When you buy a property with someone else, you can choose to buy it as joint tenants or tenants in common. Lots of people choose to buy as tenants in common because by pooling savings, you can buy a property that you otherwise might not be able to afford. But what owning as a tenant in common also allows is security if things go wrong.
For example, if a married couple buys a property with help from one of their parents, the parents might opt to own the property as tenants in common with the couple rather than gifting any money. This means if the couple end up divorcing, the parents still maintain their whole interest in the property separate from the couple. It also means the son or daughter in law can’t claim for the value of the parents’ interest in the home if a divorce were to happen.
This is because tenants in common each own a distinct percentage of the property separately. Furthermore, this percentage doesn’t have to be equal amongst all other tenants in common. This means you can split ownership 75/25 for example, rather than the usual 50/50 approach.
Joint tenants vs tenants in common
Most couples, LGBT or not, choose to buy property as joint tenants. Joint tenants differ to tenants in common in that both joint tenants own the whole property together in equal shares. This means if the property is sold, the equity is split 50/50 regardless of who put what in.
The reason many couples choose to buy homes as joint tenants is because if one of them dies, the other automatically inherits the remaining share of the property without incurring inheritance tax.
What happens when one of the tenants in common dies?
Tenants in common are treated slightly differently to joint tenants if one of you passes away. Essentially, as a tenant in common, you decide what happens to your share of the property. This means you can choose who you leave it to, even if the other tenants in common don’t agree.
As joint tenants there is no such choice, even if you specify in your will that you want to leave your half of the property to someone else. The joint tenancy supersedes any wishes about the property you might make in your will.
If you do want to leave your interest in the property to someone else, you’ll first need to sever your tenancy. Most people will find a solicitor to do this for them as it involves submitting a ‘Form A Restriction’ to the Land Registry.
Is a tenancy in common right for You?
Whether you choose to be tenants in common or joint tenants is mostly up to who’s buying the property. But there’s also a degree of personal choice that might affect your decision. Have a look below to see some of the key reasons people choose to be tenants in common.
Advantages of tenants in common
- Legally your share of the property is yours and no one else’s
- You can protect your share of the property if anything goes wrong
- Security that you have the choice in who inherits your share
- You can sell your share of the property without consent from anyone else (but not the whole property).
Disadvantages of tenants in common
- Potential inheritance tax implications in passing your share of the property on
- You’ll need a deed of trust to set out who owns what
- You only have rights over the percentage of the property that you own
- Generally higher legal costs if you want to alter the arrangement
What does this look like in real life?
Many couples wonder why they should consider anything but buying as joint tenants, which is natural. Below are 2 everyday scenarios where people will come together to buy properties as tenants in common:
Financially Unequal Couples
By doing this, it can be one way of ensuring ‘fairness’ through drawing up a deed of trust. This deed can say what happens in the event of a relationship breakdown, for example how much each person gets back, and what happens to the remainder of the equity. This means everyone gets back what they put in.
Couples With Children From Previous Relationships
This can be especially important if your children don’t get on with your current partner, but you still want them to inherit something from your estate.
There is no ‘better’ way of owning a property, there is only a better way to meet your own personal objectives.
Depending on your financial situation, who you’re buying with and what your later life plans are, it can be equally beneficial to buy as joint tenants or tenants in common.
Alternatively, if you are thinking of lending money in a tax-efficient manner, it’s worth thinking about how you might want to protect your interest.
If you aren’t sure about the best option for you, or you’re thinking about changing how you own a property, we can connect you with a property lawyer.