The decision as to how to hold the beneficial interest in a co-owned property is one which requires some thought, and is relevant for anyone who co-owns (or is considering co-owning) their home.
You’re probably aware that co-owners hold the legal interest in their property jointly. However, you may not be aware that co-owners also have a ‘beneficial’ interest in the property, and that this interest is held in one of two ways: as joint tenants, or as tenants in common. Which is the best option will depend on the co-owners’ circumstances. The distinction is important in a number of scenarios, particularly where:
- An unmarried couple purchase a house together;
- You plan to leave your share in a property in your will; or
- You would like to contribute towards your child’s home purchase, and they plan to co-own.
Joint tenancy or tenancy in common?
Think of the beneficial interest as an orange.
When you hold as beneficial joint tenants, it’s one, solid orange. There are no segments you can remove which are yours and yours alone to deal with as you please. You can’t leave a share in the property to someone in your will, as the property automatically passes to the surviving joint tenant(s). On a sale of the property, joint tenants are entitled to equal shares (in the absence of any agreement to the contrary). Married couples often hold as joint tenants, happy for the property to pass to their spouse in the event of their death.
Tenants in common each have their own segments of the orange. The size of the shares is agreed (50/50, 60/40 etc.); particularly useful if one party is making a larger contribution to the deposit and/or mortgage repayments. On a sale of the property, tenants in common are entitled to their relative share of the sale proceeds, and can also leave their share to a donee of their choice in their will.
Changing your mind
You can change how you hold the beneficial interest. If you hold as beneficial joint tenants and want to become tenants in common, you can do so with a ‘notice of severance’. Basically, as the name suggests, it’s the legal process of slicing up the orange.
In the recent case of Lee v Lee, an incorrect notice of severance almost prevented a son from inheriting his full share of his parents’ property on his father’s death. The court saw it appropriate to rectify the notice due to the circumstances of this particular case, but not everyone might be so lucky. The case highlights the importance of ensuring your property is held as you wish, and that your plans are legally possible.
A solicitor can help you to decide how you wish to hold the beneficial interest in your property and on the process if you want to change. You should also keep in mind that there may well be tax implications, which will also require discussion and advice.