Owning property jointly is common among couples, friends, and family members. But whether you own your property as joint tenants or tenants in common can significantly impact what happens to your share in various life events. This decision affects inheritance, financial planning, and the possibility of protecting your property from care home fees or unintended inheritance paths.
In this blog post, we’ll break down the key differences between joint tenants and tenants in common, the role of Protective Property Trusts in estate planning, and why Declarations of Trust are essential when ownership contributions are unequal.
Joint Tenants vs. Tenants in Common: What’s the Difference?
When purchasing property with another person, you’ll likely have to decide between joint tenancy and tenancy in common:
1. Joint Tenants
As joint tenants, you both own the entire property equally. There is no individual ownership split. This arrangement includes the right of survivorship, meaning that if one owner dies, their share automatically passes to the surviving owner. This structure can simplify inheritance for couples or close family members, as it avoids probate. However, joint tenancy comes with some limitations:
No Individual Shares: You each have an equal share, regardless of how much you contributed.
Automatic Inheritance: Your share will pass directly to the surviving joint tenant, which could cause issues if you wish for your children or other relatives to inherit instead.
2. Tenants in Common
In contrast, as tenants in common, each owner holds a specific share of the property, which could be equal or unequal. For example, one party might own 75%, and the other 25%, depending on their contributions or agreements. Tenancy in common provides:
Individual Ownership: Each person’s share can be specified, making this ideal for unequal contributions.
No Automatic Inheritance: Each share is part of the owner’s estate, allowing them to leave it to beneficiaries via a Will.
Flexibility for Estate Planning: With tenancy in common, you have more control over who will inherit your share, which is valuable in protecting your family from unexpected situations like sideways disinheritance.
Using Protective Property Trusts to Guard Against Sideways Disinheritance and Care Home Fees
Protective Property Trusts (PPTs) are a powerful tool for couples who want to protect their property for their loved ones, especially when structured as tenants in common. Here’s why they’re beneficial:
1. What is a Protective Property Trust?
A Protective Property Trust is written into your Will and takes effect after the first property owner’s death. Under this arrangement:
The deceased’s share of the property goes into a trust, overseen by appointed trustees.
The surviving partner continues to live in the property, often for the remainder of their life, while the deceased’s share remains protected.
This trust structure ensures that the property is ultimately inherited by beneficiaries chosen by the deceased, protecting it from potential new spouses or unintended heirs.
2. Benefits of a Protective Property Trust
Protection Against Sideways Disinheritance: If your surviving partner remarries, their new spouse could inadvertently gain rights to your property share. A PPT ensures your children or chosen beneficiaries ultimately receive your share.
Guarding Against Care Home Fees: Should your partner require residential care, only their half of the property could be considered for care fee assessments, leaving your share untouched within the trust. While not foolproof, this can help shield some of your assets from being used to cover these costs.
Supporting Family Harmony: For families with children from previous relationships, a PPT ensures everyone’s interests are respected, reducing potential family conflicts down the line.
To learn more, check out our video on YouTube - Tenants in Common vs Joint Tenants: What Every Property Owner Should Know
Declarations of Trust: Essential for Unequal Ownership
If you’re purchasing property as tenants in common with different financial contributions, a Declaration of Trust is essential. This document outlines each party’s financial interest in the property and provides clarity on ownership and contributions. Here’s why a Declaration of Trust matters:
1. Documenting Unequal Contributions
Clear Ownership Shares: A Declaration of Trust states each person’s ownership percentage, ensuring that unequal contributions are recognised legally.
Protecting Individual Investments: If one party contributed a larger deposit or handled specific property-related costs, this document formalises that arrangement, protecting each party’s investment.
2. Preserving Fairness in Case of Separation or Sale
Equitable Division on Sale: If you sell the property, the Declaration of Trust can guide how proceeds are divided based on the original contributions.
Reducing Disputes: By outlining financial arrangements upfront, a Declaration of Trust helps prevent misunderstandings or disputes should the partnership end.
3. Tax and Estate Implications
For tax planning, a Declaration of Trust is invaluable. By formalising each owner’s share, it allows for accurate Capital Gains Tax (CGT) calculations, especially if the property isn’t a primary residence. Additionally, when passing on your share, the document clarifies ownership for Inheritance Tax (IHT) purposes.
Find out more in our Blog Post: https://www.toucanlaw.co.uk/post/a-guide-to-declarations-of-trust
Planning Ahead: Essential Considerations
When deciding on joint tenancy, tenancy in common, or using a Protective Property Trust, consider these factors:
1. Aligning Your Property Ownership with Your Will
Ensuring your property ownership type aligns with your Will is essential. For instance, if you’re tenants in common, you’ll need a valid Will to specify who inherits your share. Without this, intestacy laws may determine beneficiaries, which could lead to unexpected outcomes.
2. Choosing Trustees Wisely
For a Protective Property Trust, carefully consider who will act as trustees. They will be responsible for managing your property share on behalf of your beneficiaries and balancing the needs of the surviving partner. Family members, trusted friends, or professional trustees can all serve in this role, but it’s crucial they understand your wishes.
3. Reviewing Property Ownership Regularly
Life circumstances change, so it’s important to periodically review your property ownership arrangements. If you remarry, have more children, or experience changes in financial status, ensure that your ownership type and any trusts or declarations still meet your needs.
4. Understand the Tax Implications
The impact of Capital Gains Tax and Inheritance Tax should also be considered when structuring property ownership. By holding property as tenants in common, each owner’s estate can claim IHT allowances, potentially reducing tax liabilities. However, property held in trust may still be subject to some inheritance tax, depending on its structure and the specific rules governing the trust.
Final Thoughts:
Understanding the nuances of property ownership, trusts, and declarations can feel complex, but it’s critical to ensuring your estate plan is robust and aligned with your wishes. At Toucan Law, we specialise in helping clients protect their assets, avoid sideways disinheritance, and plan for care home costs through strategic property ownership choices and tailored legal tools.
Whether you’re buying property, creating a Will, or setting up a trust, our team can guide you every step of the way. Get in touch today to discuss how we can help secure your family’s future and ensure your hard-earned assets are protected for the next generation.
For further reading, check our other Blog Posts:
https://www.toucanlaw.co.uk/post/i-own-my-house-jointly-i-think-joint-tenants-tenants-in-common and https://www.toucanlaw.co.uk/post/protective-property-trusts-an-overview
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