If you are buying a property with somebody, you will either buy the property as joint tenants or tenants in common.
There are big legal differences between these two very similar sounding terms. When you buy a property as tenants in common, you each own a certain share in the property, while if you buy as joint tenants, you will each own the whole property.
This has extremely substantial implications if you ever intend to sell the property.
In this blog we will look at the benefits and drawbacks of each method of jointly holding property.
Tenants in common
Tenants in common each own a separate share of a property. For example, two people can each own 50% of a house. In Scotland this type of ownership is called “joint ownership”.
These shares can differ in size. This can often reflect the amount of money each party put into the property. Any number of people can own a share in a property.
For example, if three people are buying one property, they can split the ownership in any way, provided the total amounts to 100%. One person could buy 90%, and two could buy five percent.
This amount can also be altered over time as people pay into the property. One of the main appeals of a tenancy in common is this flexibility.
While in theory tenants in common can opt for individual mortgages, few lenders are willing to operate like this. The most common way a property purchased by tenants in common is financed is by a joint mortgage.
Owners can leave their share to anyone they like in their will. If an owner does not leave their share to anyone, it will be inherited according to the rules of intestacy.
When it comes to selling a tenancy in common the law says all the owners must agree to sell, unless a Deed of Trust specifies otherwise.
What is a Deed of Trust?
Often people buying as tenants in common will draw up a legal document known as a Deed of Trust or a Declaration of Trust. This is done when a solicitor starts down the conveyancing route.
A Deed of Trust sets out the conditions upon which you are buying the property.
It can feature:
- Details about when and how the property can be sold.
- How the decision to sell can be reached. For example, you can have it so just one person can decide to sell, or a majority of shareholders is needed to make the decision, or even so unanimity is required.
- What proportion of the sale price each person should get. This can be based on how much of the deposit each person contributed, how much of the mortgage each person paid, other factors, including work put into a project, or any mixture of these things.
It is advised that each joint owner get separate legal advice to make sure the agreement represents their interests fairly.
Joint tenants
Buying a property as joint tenants mean you both own the property equally.
It does not matter what each person has put towards buying the property, instead as joint tenants the ownership is considered entirely equal.
In the eyes of the law, you are a single entity, so you will need a single mortgage between you. Additional loans cannot be taken out against the property without the permission of all the owners.
If you decide to sell, you must decide to sell together. A person owning a property as a joint tenant cannot be forced to sell, or even leave without a court order.
You are restricted to a maximum of four total owners in a joint tenancy.
One thing that differentiates a joint tenancy from a tenancy in common is the right of survivorship.
What is the right of survivorship?
The right of survivorship means that when a joint tenant dies, the ownership of the joint tenancy stays with the remaining members.
This means that the ownership will pass to them rather than being inherited according to either the deceased’s will or the rules of intestacy.
It will be split equally between the surviving owners. You cannot leave this share to anyone else.
People who inherit property, both owned jointly and in common, must pay inheritance tax.
The only exception to this is when a person’s spouse dies. One does not have to pay inheritance tax on anything owned by their deceased spouse.
Joint mortgages
Whether you are buying a property as tenants in common or as joint tenants, it is likely that you will be applying for a joint mortgage.
Joint mortgages are usually held by two people, though some lenders allow up to four borrowers to share a mortgage. Lenders will usually only take account of the two highest earners’ incomes when deciding how much they can lend.
A joint mortgage has a couple of advantages.
Firstly, you can usually borrow more on a joint mortgage. This is as you have the combined income of two people, which means lenders are more comfortable offering a larger mortgage.
Combining savings for a larger deposit can mean that you pay a lower rate of interest, potentially saving thousands in the long term.
Finally, having two incomes gives you more security in case the unforeseen happens and one of you loses your job or ability to work. This means that if something bad happens, you will not necessarily lose the property.
There are a few disadvantages to a joint mortgage, however.
First, you need to be sure you trust the people you are applying for a mortgage with. This is because you will all be equally responsible for making the repayments, and if one person fails to pay their share, the others need to make up the shortfall.
In addition, if one of you runs into financial difficulties, it could harm the credit of all of the borrowers, making it harder for you to borrow in future.
How can I change from a joint tenancy to a tenancy in common?
If you own a property as a joint tenant, you can change this to become tenants in common. This is known as severing a joint tenancy.
To do this in England and Wales, you need to fill in the official form, and if the other tenants have not agreed to sever, you need to give them written notice before hand.
In Scotland you need to change the title deeds to the property. It is recommended to use a solicitor for this.
In Northern Ireland, you need to fill in a “transfer of whole” form and submit it to Land and Property Services. If other joint tenants do not agree to sever you will need to take out a mortgage on your share of the property. This can be for as little as £1 and you can pay it back immediately.
How can I change from a tenancy in common to a joint tenancy?
In order to change from a tenancy in common you, or a legal professional working on your behalf, will need to fill out a Deed of Trust to confirm you all want to become joint tenants. If you already have a Deed of Trust, you will need to update it.
If your title deed has a restriction, for example against the sale of the property, you will need to apply to HM Land Registry to cancel this restriction using official form RX3.
Note that if you change from a tenancy in common to a joint tenancy, the shares you previously owned in the property will become meaningless, and you will be equal partners from that point onwards.
Which is right for me?
Joint tenancies are traditionally used by couples, but this is not always the most suitable solution.
If one partner has put substantially more in to purchasing the property than the other, this will not be reflected in the ownership of a property held as joint tenants.
If they want the ownership of the property to reflect the investment made a couple would be best advised to become tenants in common.
This can also make sense if they want to split their inheritance.
If a couple get married late in life, both having children, and they own a property as joint tenants, the property will pass to the surviving partner upon the other partners death. This means that the deceased partners heirs can be cut out of inheriting any of the property owned as joint tenants.
Similarly, it can make sense for married couples owning buy to let property to be partners in common for tax purposes. If one partner is in a higher tax bracket, taxes paid on rent can be reduced by having the lower income partner own much of the property.
Alternatively, it can make sense for a group of friends buying a property together to buy as joint tenants. For example, if they want to make sure that they will all always have a right to inhabit the home, buying as joint tenants can make sense.
This is a very personal decision and is different for everyone’s circumstances. If you are unsure about which type of joint ownership would work for you it can be a good idea to talk to a solicitor or financial advisor.
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