The way in which you share ownership of property with your spouse can have big financial implications, writes Tracy Henson of accountants Barnett & Turner. When a husband and wife buy a house together, they are usually ‘joint tenants’, which means they have equal rights to the property. In the event that one of them dies, the home will automatically pass to the other partner, but it’s only possible to sell or remortgage with the other’s consent. A good analogy is to think of the property as a bowl of soup. It’s not possible to cut it in half.
If you’d prefer your property to be more like a cake which can be sliced in various directions, then it’s essential that your legal status is as ‘tenants in common’. This allows for different shares of the property to be owned by the two partners.
Imagine a scenario, for instance, in which you own a second home and rent it out. If your spouse is working and is a higher-rate taxpayer, but you earn a lot less, it makes sense for you to receive the rent as income. That way, you’ll end up paying a lower marginal rate of tax and help to protect your child benefit at the same time, as you could avoid your partner heading over the £50k threshold established by the government.
It’s worth bearing in mind though that HMRC will, by default, consider you to be joint tenants, so you need to make your status clear and legally watertight. It’s usually a simple matter, if both of you agree. You just need to arrange to make a declaration of trust stating the way in which the shares are owned. Alternatively, one partner can issue a notice of severance. The co-owner simply has to acknowledge receipt. Either method then also requires a form to be sent to the Land Registry.
Most of the time, I would advise my clients that the minority shareholder in the property should retain at least a nominal 1% stake. Remember that you’re not just splitting ownership of the income, but also the underlying ownership of the house or apartment, which calls for a great deal of trust. If a husband, say, has all the earned income in the household, while the wife receives the proceeds from property, this may be good news from the perspective of income tax liability, but may not be an ideal scenario in relation to Capital Gains Tax and inheritance tax. So talk through the options with your accountant before making any fundamental decisions.
If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk