What is a Tenants in Common Agreement?

When you purchase a property with someone else, you will typically find that the ownership is under Joint Tenancy.

This means that if one person passes away, the remaining share of the property is passed to the surviving partner.

This is a traditional method of property ownership and today, many people are instead opting to purchase property on a Tenants in Common basis.

This can protect each individual’s share of the property, help with inheritance tax in some cases, or prevent care home fees.

In this article we explore what a Tenants in Common agreement is and why it might be suitable for you on your next property purchase. Let’s jump in.

What’s the Difference Between Tenants in Common and Joint Tenants?

With a Tenants in Common agreement, you will own a specific share of the property you’re purchasing. As a basic example, if you and your partner buy a property, you can opt to own 50% of the house each.

Unlike a Joint Tenants agreement, in the event you pass away, you can opt for your share of the property to go elsewhere rather than automatically to your partner.

You can see from the table below an overview of the main differences between Joint Tenants and Tenants in Common.

As you might have guessed by now, both Joint Tenancy and Tenants in Common agreements have many practical implications when buying and owning a property.

Don’t get confused though, we break each aspect down further into digestible bite-sized pieces so you can decide what is best for you.

What Are the Main Features of a Tenants in Common Agreement?

On the most basic level, a Tenants in Common agreement allows you to split the property you own with others in predefined shares.

These shares don’t have to be equally split between owners and you could apportion 99% of the property to yourself and 1% to someone else.

There are three other major features of a Tenants in Common agreement:

• If you pass away, you can nominate who receives your share of the property through a trust or a will.
• You have the freedom to sell your share of the property providing the other owners agree.
• You can apportion shares in accordance with how much each party has invested in the property. For example, if you put in a larger deposit, you could give yourself a higher share of the property to reflect this.

A Tenants in Common agreement is considered a more flexible way of defining property ownership. However, it does require more administration and there are things to be mindful of before selecting this option.

Tenants in Common and Declarations of Trust

In most cases, a conveyancer will recommend a declaration of trust being set up alongside a Tenants in Common agreement. A declaration of trust is a document that sets out the rights of owners individually and collectively.

Declarations of trust can be very simple or wide-ranging depending on the owners’ needs and circumstances.

For example, a common clause added to a trust is that existing owners have the right of first refusal on any portion of the property being sold.

More complex declarations of trust can even nominate who the share can or can’t be sold to.

When entering a Tenants in Common agreement, it is vital that you consider all potential outcomes and assess what needs you have as a party to the agreement. If you’re concerned about living with a complete stranger in the future, it is best to discuss a declaration of trust with the conveyancer and set out each owner’s responsibilities.

How Do You Alter a Tenants in Common Agreement?

There are three main ways that you might want to alter or change a Tenants in Common agreement. In order to change agreements, it is best to have consent of all parties involved, though you may still be able to change agreements by filing with the courts without other owners consenting.

Making an Alteration to an Existing Tenants in Common Agreement

If you are party to a Tenants in Common agreement, you can alter it. But, in order to do so, you must ensure that all parties agree and then contact a solicitor to undertake any changes to the agreement.

Tenants in Common agreements range in complexity and some have wills or trusts that need to be changed alongside the actual Tenants in Common aspect.

A solicitor will ensure all parties’ rights and documentation is correct and updated with any changes made.

Changing from Joint Tenants to Tenants in Common

If you’re on a Joint Tenants agreement, you can change this with the agreement of the other parties to a Tenants in Common agreement.

If they refuse, you will need to file a notice of severance with the courts. Depending on your circumstances, the court may or may not agree to the alteration.

Changing from Tenants in Common to Joint Tenants

If you are on a Tenants in Common agreement and you wish to change it to a Joint Tenants agreement, then you can do this by contacting a solicitor if all parties agree.

This is quite common for people who decide to get married and want to share assets equally.

Why are More People Using Tenants in Common Agreements?

There are five reasons that more people are now opting to use Tenants in Common agreements.

1. Controlling Who Inherits Your Share of the Property: If you want to leave your share to children or grandchildren, having a Tenants in Common agreement allows you to pass your percentage of the property to who you want.
2. Inheritance Tax: This is a very specific reason to enter into a Tenants in Common agreement and it isn’t suitable for everyone. If you’re unmarried and not in a civil partnership, passing on a share of a property might avoid meeting the inheritance tax threshold when compared to the whole property value.
3. Share of Property Matching Contribution: Simply, if you want to pay more towards a property, you can match the amount you have paid into the property with your share. This is attractive to young couples who wish to own a property, but one party has a deposit to put down.
4. Care Costs: If you go into care, the government will look at what assets you hold and what you can afford to contribute yourself toward your ongoing care costs. If you have a Tenants in Common agreement, the government will only be able to take into consideration your split of the property value, rather than the overall property value.
5. Separation and Divorce: According to the ONS, as of 2020, the number of marriages that will end in divorce is 42%. For unmarried couples, the percentage of breakups is much higher.

When you’re Joint Tenants, the property is treated as a whole in any court proceedings and divided according to any settlement or ruling. Divorce settlements will normally switch Joint Tenants to Tenants in Common with a clearly defined share of the ownership.

With Tenants in Common, each party has already defined their share of property ownership. It can, however, also lead to complications with separation and divorce — see disadvantages of Tenants in Common further down.

The Advantages of Tenants in Common

We have broadly covered the many advantages of Tenants in Common already. But to summarise, each party will know going into a property purchase how much they own and what their responsibilities are for the property.

You will be able to sell your share of the property with the consent of other owners and even if they don’t consent, you can apply to the courts to force them to allow you to sell your share.

In the event you pass away, sole survivorship doesn’t automatically come into play, and you can nominate who inherits your share of the property either through a declaration of trust or your personal will.

Owning a predefined share can mean that you avoid meeting inheritance tax and care cost thresholds.

The Disadvantages of Tenants in Common

Although Tenants in Common has many positive aspects, there are also some big disadvantages. Sometimes, due to the complex nature of such agreements, these can be overlooked and unrealised until they become a problem.

The main disadvantages of Tenants in Common are:

Divorce and Separation

Under a Tenants in Common agreement, you might find that you own a part of the property that you no longer want to live in. If the other owner refuses to sell the property, this could mean that you face going to court to sell. In the meantime, any mortgage you want to get on another property will take into account any existing liabilities on your current share of the property.

This can be even more problematic if the court has ruled that the other owner has the right to remain in the property under a divorce agreement because it is the primary family home. In these cases, you could find yourself on the hook for ongoing property and mortgage costs without being able to dispose of your share of the property.

Sole Survivorship

If you’re married or in a civil partnership, ordinarily you will inherit the property automatically if you’re Joint Tenants. Tenants in Common can still be passed on to your spouse or partner if your will or trust specifies this, but there is no automatic right to sole survivorship.

This makes Tenants in Common unsuitable if you’re married or in civil partnerships and you’re intending to leave the property to your spouse or partner. The share of the property will go into your estate, and this can lead to complications with inheritance tax thresholds as well as the usual time delays and fees associated with probate procedures.

If you die without a will or a trust document outlining who inherits your share of a property, your share will be intestate. This causes additional costs and complications when passing your share onto your next of kin — something that is especially problematic if you simply wished your spouse or partner to inherit the share.

Tenants in Common can lead to individuals selling their share of the property to buyers who other parties may not want as owners. When selling the entire property, the owners need the agreement of all parties.

Lastly, if one of the owners needs to go into care, the Local Authority can take the owner’s share of the property to use toward care costs. This aspect is known to be problematic as it can force remaining owners into a position where they’re unable to sell or move, or on the flip side, where Local Authorities put pressure on remaining owners to sell in order to recoup their costs.

Conclusion

Whether or not you would prefer to be Joint Tenants or Tenants in Common will depend on your personal circumstances. Each type of property ownership can have far-reaching consequences and should be discussed with a professional.

Boon Brokers are a fee-free, whole of market mortgage, insurance, and equity release brokerage. Contact us today for a free, no-obligation consultation.