Holding assets jointly has its pros and cons.
Most people have heard of the concept of joint bank accounts, with some even lucky enough to have access to one, and many will also appreciate that land, such as your home can also be held jointly, albeit saddled with a joint mortgage too.
However, almost any type of asset can be held jointly, which includes company shares. Whether this is to appease a suspicious spouse or other arrangement, Fools should make sure they are aware of the practical and tax consequences of their joint ownership arrangement, and that this meets their (joint) requirements.
Types of joint property
In England, Wales and Northern Ireland (but not Scotland, where different rules apply), there are two types of joint ownership arrangement. These are
- 'joint tenancy', sometimes referred to as a 'beneficial' or 'true' joint tenancy
- 'tenancy in common', sometimes also called 'ownership in undivided shares'
If Fools buy an asset between them equally, the property will be held as joint tenants unless the owners direct otherwise. Joint bank or building society accounts are usually held as joint tenants, and assessed to tax as such.
How to spot the difference
The main characteristics of a joint tenancy are:
- all the joint owners have identical or equal interests in the property;
- the interest or share of each owner passes on their death by survivorship to the remaining owner(s), and if more than one, in equal shares; and
- each owner can sever or break up the joint tenancy (for example, by giving notice to the other owners). The owners then hold the joint asset as tenants in common.
Under a tenancy in common arrangement:
- the owners can (but not always do) have different or unequal interests in the relevant property, for example 1/4 for A and 3/4 for B;
- the interest or share of any owner passes on death under their will or, if there is no will, under the rules of intestacy; and
- the share of a tenant in common is usually in proportion to the money they put in to buy the joint property.
How does joint ownership affect income tax?
Since individual taxation was introduced in the UK (shockingly late) in 1990, each UK individual is taxed on their own income, which would include their share of income from jointly held assets.
Assets that are jointly held as joint tenants are, effectively, held as a whole and the whole then split between the number of joint owners, for example if held between two joint owners, each is entitled to 50%, if four joint owners, 25% and so on.
However, if property is jointly held as tenants in common, then each individual is assessed on their individual share in the whole, which, as described above, may be different from the other joint owners. Except if you are married, or in a civil partnership.
If you own assets jointly as a married couple, income is assumed to be split 50/50 unless you make a formal declaration on form 17. A declaration is not retrospective; it applies only to income that arises from the date a valid declaration is signed and it must be sent to the Inspector within 60 days of the date it is signed. This means that a couple will usually need to make a decision about a declaration before they know their overall tax position for the year, a skilful move by the taxman to foil any attempts at tax avoidance.
Note that the 50:50 rule does not apply to income arising from shares held in a close company. Broadly, a close company is a company controlled by no more than five people.
However, all bank accounts and building society accounts held jointly by married couples and civil partners in the UK are considered held as joint owners so the couple cannot normally make an election in respect of such accounts.
What about on death?
As described above, assets owned as joint tenants will pass under the rules of 'survivorship', which means that the surviving joint owner(s) will inherit regardless of any contrary direction under the Will. Unfortunately this does not mean that the asset value escapes IHT, as this will be included when calculating IHT due.
Assets held as tenants in common will pass according to the terms of the Will, and will also be subject to any IHT due.
However, when valuing assets for IHT purposes that are held jointly by spouses or civil partners, it is not sufficient to value each share individually, particularly where shares are concerned.
Take Mr and Mrs Equal, who each own 35% of the voting shares in a private unquoted company. When Mr A dies, his executors value a 35% holding in that company, reduced by a minority shareholding discount and calculate the IHT accordingly. However, HM Revenue and Customs will instead value the whole 70% holding and then calculate IHT on half of that majority holding. A much larger number no doubt.
More on tax from Sam Thewlis: