The key areas to consider
When buying a residential property with others, there are a number of options for how you structure the ownership. To decide on the best route, you will need to consider the particular circumstances of each person involved, the property itself and the proposed use. Speak to your lawyer first to discuss the best way to structure your ownership as this can have important ramifications later.
Consider the risks
Buying a property is a major financial commitment and is not one which you can always get out of quickly, especially if this is a joint enterprise, so you need to consider the potential future risks.
These can include disagreements over what should happen in the future or having to make up the shortfall if another owner defaults on mortgage repayments.
Most importantly, discuss what should happen if one of you wants to sell up, but the other does not. You will need to agree an exit strategy. For example, on what basis will you be able buy your co-owner out? As well as setting out the percentage share you each own, consider how to value it. Always talk your plans through with your lawyer for advice tailored to your personal circumstances.
Ways of owning a property
The two most common ways of owning a property with someone else are:
- Joint ownership – If you are buying a residential property with a friend or partner, the most common option is to own the property jointly. It is possible to register up to four owners of a property at the Land Registry. However, you must also decide whether to be joint tenants or tenants in common. The law treats joint tenants as owning the whole of the property together.
- Tenants in common – In contrast, tenants in common each own a share in the property. This distinction determines the division of any profit on sale and what will happen to your interest should you die. Generally, if you want your share to reflect your individual contribution, you should be tenants in common. Likewise, if you want to leave your interest under the terms of your Will, rather than for it automatically to pass to your co-owner.
Declaration of trust
When you own property jointly, a trust arises automatically. However, being tenants in common gives you flexibility to specify the terms on which you own the property. Your lawyer may advise you to complete a document which sets this out, known as a ‘declaration of trust’.
A declaration of trust with floating shares can even take account of matters which you may not be able to quantify at the time of your purchase. The inclusion of a suitable formula allows you to calculate your respective beneficial interests at any time and can better reflect your individual contributions. For example, if one of you pays more towards the mortgage or renovations.
Other types of trust ownership
Occasionally, it may be appropriate to hold the property under a different type of trust. For example, if one of the owners is under 18 or you have specific concerns, such as for inheritance planning or providing for a disabled son or daughter.
These situations can be complex, and we can help ensure the legal structure is right for your individual circumstances.
Finally, if you are buying an investment property, you may want to consider using a corporate structure. Instead of owning the property directly, you own shares in a company which owns it, usually receiving income in the form of dividends.
This can have tax advantages and can make longer term estate planning easier, but you will need to consult an accountant and consider the additional administration of running a limited company.
You should consider how you will finance your purchase early on. Discuss your plans with your lawyer as this can impact on other aspects of the transaction. For example, most buy-to-let mortgages will have conditions restricting the borrowers from living in the property. Conversely, if you intend living in the property, most mortgage terms will preclude you from using a corporate structure.
Choosing the right structure can also have tax advantages. For example, many buy-to-let investors purchase through a company because of the potential savings in offsetting all the mortgage interest against profits. However, there are potential downsides too; you may have less mortgage choice and end up paying a higher rate of interest.
Even buying your own home with a partner or friend could create tax implications further down the line. For example, if you move out but keep your share of the property, you could end up paying more stamp duty on your next home.
It is vital, therefore, to take expert independent financial and legal advice.
Some final words
Over time, your priorities or circumstances may alter. Legislation and tax rules will probably also change during your ownership. So, it is important to review your arrangements regularly.
Having a lawyer who fully understands your situation will help protect your arrangements. We are always happy to discuss any developments with you, whether rewriting your Will or changing the legal basis of your property ownership.
For further information, please contact Pippa Woodcock in the Residential Conveyancing Team on 01832 273506 or email [email protected].
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