Will I save tax if I hold property in a limited company?

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Since the introduction of the finance cost restriction, we are asked this question a lot.  We have a series of blogs that expand on the issues briefly covered here.

The question really needs expanding to:

“Are the costs of holding property in a limited company lower than the costs of holding property personally when totalled up over the period of ownership?”

For basic rate taxpayers, the general advice is the same as it always has been: hold property personally to take advantage of the generous capital gains tax exemptions only available to individuals.

For higher rate taxpayers, giving an answer without crunching the numbers is pretty much impossible because there are so many variables in play:

  • If you already hold property personally then transferring into a company is likely to incur capital gains tax and stamp duty as well as other costs such as conveyancing, accountancy and early repayment mortgage charges
  • Individuals and companies are taxed under different regimes on their income and gains and the interaction between the regimes is complex
  • These tax regimes and your plans for the property may change in the future; the advice given now could be redundant in 5 years’ time
  • Companies are more expensive to run, with higher mortgage interest rates and accountancy costs

However, a common scenario we encounter is that of an unmarried higher rate taxpayer looking to invest in property for the first time. Purchasing the property via a limited company can potentially be beneficial in this particularly simple case if the intention is to hold the property long-term and leave the profit in the company bank account.

It is highly recommended that you seek professional advice if you are considering using a limited company.

When do I need to register for self assessment?

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Your obligations here depend on how much income you are receiving.

Do nothing

If the gross rent you receive is no more than £1,000 then you do not need to declare anything to HMRC as this income is covered by the property allowance.

Call HMRC

If your rental income, after allowable expenses, is between £1,000 and £2,500 and you have another source of PAYE income, such as a full-time job or pension, then you can ask HMRC to collect the tax you owe via PAYE without completing a tax return.

Register for self assessment

You will need to declare your rental income on a self assessment tax return if:

  • Your rental income, before allowable expenses, is £10,000 or more; or
  • Your rental income, after allowable expenses, is £2,500 or more

If you’ve not previously completed a tax return then you must register for self assessment by 5 October following the end of the tax year. So if you need to file a tax return for the year ended 5 April 2019 then you must register for self assessment by 5 October 2019.

See also:
What can I do if I’ve not declared my rental income?
When do I need to submit my tax return by?
When do I need to pay income tax by?

What can I do if I’ve not declared my rental income?

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You must tell HMRC straight away. If HMRC discovers that you owe tax then they will charge penalties of up to 100% of the underpaid tax. The exact penalty will depend on the severity of your non-compliance.

We recommend disclosure of undeclared rental income via HMRC’s long-running Let Property Campaign. Under this campaign, your tax affairs can be brought up to date without filing back-tax returns. The penalty regime is also much more lenient with maximum penalties of 20% of the underpaid tax.

In all cases, you will be charged simple interest on underpaid tax.

See also:
When do I need to register for self assessment?
When do I need to submit my tax return?

Which records do I need to keep?

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Good record keeping invariably leads to lower tax bills. There are two types of records you should keep, those required for income tax and those required for capital gains tax.

Income tax

The records that support figures when calculating income tax must be kept for at least 5 years following the submission deadline applicable to that tax return. So records relating to your tax return for the year ended 5 April 2019 need to be kept until at least 31 January 2025.

You’ll need to keep records such as:

  • Bank statements
  • Rent agreements
  • Mortgage statements
  • Agent statements
  • Receipts and invoices
  • Detailed logs of domestic items
  • Detailed day logs for furnished holiday lets

Capital gains tax

When calculating capital gains tax, you will need to keep your records for much longer. The same principle applies as for income tax but you will often not declare a capital gain until many years after you purchase the property or incur enhancement expenditure.

You’ll need to keep records such as:

  • Completion statements
  • Mortgage agreements
  • Invoices for major repairs required immediately following purchase
  • Invoices for property enhancements, such as extensions and conservatories
  • If you previously lived in the property, the dates of occupation
  • Any periods the property was without a tenant

If paper invoices, statements and agreements are to be kept for many years, sometimes decades, then you will need to remember that these documents will fade with time. You’ll want to scan these and store them electronically.

See also:
Do I need a business bank account?

Do I need a business bank account?

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You don’t need a separate business bank account for your property business unless you are operating via a limited company.

Although not a legal requirement, it is advisable for unincorporated landlords to set up a business bank account for three main reasons:

  • It’s a useful way of keeping business income and expenditure separate from personal transactions
  • When Making Tax Digital is fully introduced, submissions to HMRC will be much easier
  • If HMRC enquire into your tax return, the business account statements would be the only statements they could inspect

See also:
Does Making Tax Digital affect landlords?

Do I need to charge VAT on rental income?

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Rental income is exempt from VAT so even if you were registered for VAT (via self employment, for example) then you would not add VAT onto the rent you charge your tenant.

You can “opt to tax” a building, which means VAT would be charged on the rent. This can be a useful strategy with commercial property, especially if the previous owner had opted to tax, but is best avoided when letting residential property.

Opting to tax is an extremely complicated area of VAT so you should always take professional advice before going down that route.

See also:
Are there any opportunities to save VAT?

Do I pay National Insurance on my rental income?

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If you run your property portfolio as a business, rather than an investment, then you will need to pay Class 2 National Insurance if your profit is above the small profits threshold.

You are likely to be operating as a business if being a landlord is your main source of income or if you rent out more than one property.

Does my property qualify as a furnished holiday let?

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A furnished holiday let (FHL) has distinct advantages over normal buy-to-let property:

  • The finance cost restriction doesn’t apply to FHLs
  • Capital allowances can be claimed on white goods and furniture. This means you get tax relief when the asset is purchased rather than when it is replaced
  • FHLs qualify for Entrepreneurs’ Relief so would be subject to a capital gains tax rate of 10% when sold
  • Gains made on the sale of FHLs can be deferred if they are reinvested in another business asset, such as another FHL
  • Gains arising on the gift of a FHL to a connected family member can also be deferred

There are some strict conditions that need to be met when determining if a property qualifies as a FHL:

  • The property must be located in the UK or the European Economic Area (EEA). The EEA is the EU member states plus Iceland, Liechtenstein and Norway
  • The property must be furnished sufficiently so as to allow normal occupation
  • You must intend to make a profit, not just hold out for growth in the value of the property
  • The property must be available to let on a commercial basis for at least 210 days in the year
  • The property must actually be occupied on a short let basis for at least 105 days in the year. A short let covers a period of no more than 31 days
  • The total of long lets during the year cannot be more than 155 days

Do I pay tax on the rent I receive from a lodger?

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Under the rent-a-room scheme, you don’t pay tax if the rent received from a lodger is under £7,500 in the tax year. If you jointly own your home then the rent and the allowance is split between the owners.

If you receive more than £7,500 in the tax year then you will pay tax on your rental income after deducting the higher of:

  • £7,500; and
  • The actual costs

See also:
Which expenses can I claim?

Do I pay tax if I let my property via Airbnb?

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This depends on how much rent you receive in the tax year:

  • If £1,000 or less then the income is automatically covered by the property allowance and no tax is due
  • If over £1,000 then you can currently apply the rent-a-room scheme

HMRC don’t like the second option, though, as they feel letting via Airbnb is not within the spirit of the original intentions of the rent-a-room scheme. HMRC has already had one attempt at applying new legislation, which proved unworkable, but are likely to be back with a different approach in the near future.

See also:
Which expenses can I claim?

What if I let property to a relative?

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There are special rules if you allow a connected family member to live in one of your properties for free or for a discounted rent.

The maximum rental expenditure you can claim in respect of that property is limited to the rent the family member has paid you. As such, you can’t report to HMRC a loss from that particular property.

Which expenses can I claim?

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To obtain tax relief, expenditure must be incurred wholly and exclusively in the property business. Common expenditure includes:

  • Mortgage interest
  • Repairs and maintenance
  • Household cleaning and garden upkeep
  • Letting agent fees
  • Replacement of domestic items, such as white goods and furniture
  • Utilities and council tax
  • Ground rent and service charges
  • Property and landlord insurance
  • Regulatory costs, such as gas certificates and landlord licences
  • Subscriptions to landlord associations
  • Advertising for tenants
  • Accountancy fees
  • Legal fees for short lets of under 12 months
  • Legal fees for renewing a lease of under 50 years
  • Mileage and other travel costs incurred in running the property business
  • Administrative expenses, such as phone, post and stationery

Also see:
Can I get tax relief on white goods and furniture?
Can I claim the cost of new bathrooms and kitchens?
Can I get tax relief on mortgage interest?
Can I get tax relief when I improve a property?

Can I get tax relief on white goods and furniture?

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This depends on the type of property you are making the purchase for.

Regular buy-to-let

You can’t claim tax relief when you first buy an item but you can claim the cost of replacing it. The replacement must be for the sole use of the tenant in the property and the old item must no longer be available for use.

The cost you can claim is limited if the replacement is an improvement on the old item or if you part-exchange the old item.

The items you can claim replacement costs for include:

  • Moveable furniture, such as beds, tables and free-standing wardrobes
  • Furnishings, such as curtains, carpets and floor coverings
  • Household appliances, such as fridges, freezers, washing machines and TVs
  • Kitchenware, such as crockery and cutlery

Furnished holiday lets

With FHLs you claim capital allowances instead. This means you can get tax relief when you first purchase the item rather than when you replace it.

Also see:
Does my property qualify as a furnished holiday let?

Can I claim the cost of new bathrooms and kitchens?

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Provided you don’t significantly improve over and above normal modernisation, the renovation of existing bathrooms and kitchens is a repair. The costs can therefore be deducted from your rental income.

Installation of new bathrooms or kitchens, for example a downstairs toilet or shower, would be considered an enhancement to the property and tax relief would only be obtained when you sell the property.

Can I get tax relief on mortgage interest?

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Yes, but restrictions apply in certain circumstances.

The amount of interest you can claim is reduced if your outstanding mortgage capital is more than the purchase cost of the property (or the market value of the property when it was introduced into your property business).

A common example of when this restriction would apply is when a mortgage is raised on your home for the dual purpose of purchasing a rental property and releasing equity for personal use. Say you raise a mortgage for £100,000 and use this to purchase a rental property for £80,000 and a new car for £20,000, then only 80% of the interest will be an allowable rental expense.

From 6 April 2020, tax relief for higher rate taxpayers is restricted to the basic rate of 20%. This is known as the “Finance Cost Restriction” and the costs covered include:

  • Mortgages interest
  • Interest on loans to fund renovations or enhancements
  • Arrangement fees
  • Overdraft interest
  • Early repayment charges

There are transitional arrangements in place for the 2017/18, 2018/19 and 2019/20 tax years.

As well as higher tax bills, the way the finance cost restriction is operated means your official taxable income is increased, potentially leading to:

  • Brought forward losses being used up quicker
  • Student loan repayments being higher
  • Child benefit being repaid

The finance cost restriction does not apply to companies, furnished holiday lets or commercial property.

Can I get tax relief when I improve a property?

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Yes, but only when you sell the property.

Costs that improve a property – those that increase the value considerably – are capital costs so will count towards reducing your capital gain. Such costs are known as “enhancement expenditure” and common examples would include:

  • Extensions
  • Conservatories
  • Loft conversions
  • Conversion from commercial property to residential, such as a barn conversion
  • Conversion from single occupancy to a house in multiple occupation (HMO)
  • Restoration of a property purchased in a state of dereliction or severe disrepair
  • Installation of parking areas or access roads
  • Significant upgrades over and above regular modernisation, for example replacing MDF worktops with granite

See Also:
Will I pay tax when I sell a property and if so at what rate?

Can I use property losses to reduce my tax bill?

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Yes, but only normally in the future.

Losses arising in a property business can only be carried forward to reduce the profits arising in the same property business. A property portfolio is split into four property businesses:

  • UK buy-to-let properties
  • UK furnished holiday lets
  • European economic area buy-to-let properties
  • European economic area furnished holiday lets

So a loss arising in the UK BTL business can only be carried forward to reduce future profits arising from UK BTL properties.

The only exception to this are losses arising in the FHL businesses that are attributable to capital allowances claimed on equipment, white goods and furniture. These losses can be deducted from your general income in the current or previous tax year.

See also:
Does my property qualify as a furnished holiday let?
What if I let property to a relative?

When do I need to submit my tax return by?

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All of the dates discussed below relate to the tax year ended 5 April 2019.

31 October 2019
• Paper tax returns must be submitted by this date

30 December 2019
• If you want HMRC to collect the tax you owe via PAYE than you must submit a digital return by this date.

31 January 2019
• All other digital tax returns must be submitted by this date

If your tax return is submitted late you will be charged a penalty; the later the return the higher the penalty.

See also:
Does Making Tax Digital affect landlords?

When do I need to pay income tax by?

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All of the dates discussed below relate to the tax year ended 5 April 2019.

31 January 2020

  • The balance of tax due in respect of the tax year to 5 April 2019
  • First payment on account in respect of the tax year to 5 April 2020

31 July 2020

  • Second payment on account in respect of the tax year to 5 April 2020

If the income tax you owe is under £1,000 then you will be required to pay this in full by 31 January 2020.

If the income tax you owe is under £3,000 and you have a source of PAYE income, you can ask HMRC to collect what you owe via your tax code.  The tax would then be collected between April 2020 and March 2021.

If you pay your tax late then you will be charged simple interest and surcharges.

See also:
When do I need to submit my tax return?
When do I need to pay capital gains tax?
What are payments on account?
How much should I be setting aside each month to cover my tax bills?

What are payments on account?

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If the income tax you owe is £1,000 or more then you will be required to make payments on account toward your next tax bill. The payments on account are calculated on the assumption that your next tax bill will be the same as your current tax bill. They are due in two instalments, 50% on 31 January and 50% on 31 July.

If your actual tax bill is higher or lower than the payments on account you have made then the difference is accounted for the following January.

You don’t have to make payments on account if at least 80% of your tax liability for the year has already been collected through PAYE.

Payments on account are difficult to visualise so to illustrate them let’s look at an example. For his first three tax years, Tom calculates his income tax liabilities to be:

• 2016/17 – £500
• 2017/18 – £2,000
• 2018/19 – £2,500

He needs to make tax payments as follows:

• £500 by 31 January 2018
This is the amount due in respect of 2016/17. No payments on account toward 2017/18 tax are required since the total liability is under £1,000

• £3,000 by 31 January 2019
This is the £2,000 due for 2017/18 plus the first payment on account of £1,000 toward 2018/19 tax

• £1,000 by 31 July 2019
This is the second payment on account of £1,000 toward 2018/19 tax

• £1,750 by 31 January 2020
This is £2,500 for 2018/19 minus the £2,000 worth of payments on account already paid toward 2018/19 plus the first payment on account of £1,250 toward 2019/20 tax

• £1,250 by 31 July 2020
This is the second payment on account of £1,250 toward 2019/20 tax

How much should I be setting aside each month to cover my tax bills?

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We recommend that you put aside a portion of your income as it is earned to cover future tax liabilities.

For basic rate taxpayers we recommend between 10% and 20% of the gross monthly rent you receive.

For higher rate taxpayers we recommend between 25% and 35% of the gross monthly rent you receive.

Will I pay tax when I sell property?

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If you sell a property for more than you paid then you may have capital gains tax to pay. From your sale proceeds, you are allowed to deduct:

  • The original purchase cost
  • Costs of purchase, such as legal fees, surveyor fees and stamp duty
  • Costs of sale, such as estate agent fees and legal fees
  • Enhancement expenditure
  • Other reliefs, such as principal private residence and lettings relief
  • Your capital gains tax annual exemption

If you’re still left with a gain after deducting all of the above then you will pay capital gains tax on that gain.

The calculation for companies selling property is broadly the same only they are not allowed to claim reliefs such as principal private residence relief or an annual exemption.

See also:
Can I get tax relief when I improve a property?
When do I need to pay capital gains tax by?
What if I make a capital loss when I sell a property?
Do companies pay capital gains tax?
What are the capital gains tax rates?

What if I make a capital loss when I sell a property?

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Capital losses arising in a tax year can be used to reduce:

  • Any other capital gains you have realised in that tax year
  • Capital gains you realise in the future

If you make a loss by selling or gifting a property to a connected family member then you can only use this loss to reduce gains arising out of transactions with that same family member.

What are the capital gains tax rates?

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This depends on the type of property you are selling.

Residential property

  • The portion of gain falling within your basic rate band is taxed at 18%
  • The rest of the gain is taxed at 28%

Commercial property

  • The portion of gain falling within your basic rate band is taxed at 10%
  • The rest of the gain is taxed at 20%

Furnished holiday lets

  • Provided the FHL is held for at least 2 years and your share of the property is more than 5% then the whole gain is taxed at 10%

See also:
Will I pay tax when I sell a property?

When do I need to pay capital gains tax by?

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If you are UK resident then capital gains tax currently needs to be paid over by the 31 January following the end of the tax year in which the gain was made.

So if you sell a property in October 2018, this falls in the tax year that runs to 5 April 2019. The tax due on the sale would therefore need to be paid by 31 January 2020.

However, this deadline is changing. If you sell a residential property after 6 April 2020 then you will have 30 days to file a return and pay a capital gains tax payment on account to HMRC.

You will still need to declare the gain on your tax return for the year. If your final capital gains tax position differs from the total capital gains tax payments on account you have made in the year then the difference is accounted for on your tax return.

You won’t need to declare the sale of a property within 30 days of disposal if no capital gains tax is due. For example, the gain may be covered by the annual exemption, capital losses or principle private residence relief.

Do companies pay capital gains tax?

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No, they pay corporation tax on their income and capital gains.  Corporation tax is currently 19% but is dropping to 17% from 1 April 2020.

Can I gift property to my family?

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Yes, but you need to consider the capital gains tax, stamp duty, inheritance tax and income tax implications.

Capital gains tax

Property gifted to “connected” family members is deemed to be disposed of at market value and will fall within the capital gains tax regime. Your connected family members would include:

  • Your husband, wife or civil partner
  • Your brothers, sisters, parents, grandparents, children, grandchildren and their husbands, wives or civil partners
  • Your husband, wife or civil partner’s brothers, sisters, parents, grandparents, children, grandchildren and their husbands, wives or civil partners

Although they are connected family members, gifts to a spouse or civil partner are exempt from CGT and IHT so can be a very useful tax planning strategy for both income and capital taxes.

Stamp duty

If any “consideration” is given for the property then stamp duty may be payable by the family member receiving the property. Consideration is normally given via a cash payment but it can also be given through the transfer of a liability from you to the family member.

For example, outstanding mortgage capital transferred with the property would be consideration because the family member taking on your debt means your net worth will have increased.

Inheritance tax

If you don’t survive for more than 7 years following the gift then the property will remain in your estate for inheritance tax purposes.

If you are gifting your main residence and you continue to live in the property rent-free after the gift then the property will also remain in your estate.

Income tax

Once gifted, any rental income received from tenants will be the income of the family member and they will need to consider if income tax is payable and if a self assessment registration is required.

Gifting property can be a useful tax planning strategy but you must take professional advice beforehand.

See also:
Will I pay tax when I sell property?
What are the capital gains tax rates?
What are the stamp duty rates?

What are the stamp duty rates?

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The rates are different for residential property and commercial property.

Assuming you already own your own home, then any additional residential property you buy will incur stamp duty on the purchase cost as follows:

  • 3% on the first £125,000
  • 5% on the the next £125,000 (£125,001 to £250,000)
  • 8% on the the next £675,000 (£250,001 to £925,000)
  • 13% on the the next £575,000 (£925,001 to £1.5 million)
  • 15% on the the remaining amount (above £1.5 million)

These rates also apply to companies purchasing residential property.

If you purchase 6 or more residential properties in one transaction, or a property that is part residential, part commercial, then you can apply commercial property stamp duty rates which are as follows:

  • 0% on the first £150,000
  • 2% on the the next £100,000 (£150,001 to £250,000)
  • 5% on the the remaining amount (above £250,000)

Are there any opportunities to save VAT?

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Even though most rent is exempt from VAT, there are still a couple of areas that can save you money:

Partial exemption

If you’re a VAT registered sole trader and you own a property then you’ll be “partially exempt” and able to reclaim the VAT on your property expenses if:

  • Your property activity makes up less than 50% of your total activity (this is a broad simplification of two separate tests); and
  • The VAT on your property expenses amounts to less than £7,500 in a year

Paying for construction services

If you use a VAT registered builder to construct a new house or flat then they should not charge you any VAT

If you use a VAT registered builder for any of the services listed below then they should charge you VAT at a rate of 5%:

  • Installation of energy saving products
  • Converting a building into a house or flats
  • Increasing or decreasing the number of dwellings within a property
  • Renovation of a residential property that hasn’t been lived in for at least 2 years
  • Work carried out on other non-residential property, such as protected buildings, residential caravan parks, student accommodation and care homes

What is ATED?

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ATED is the “Annual Tax on Enveloped Dwellings” and applies to properties held within a company. The tax is paid once a year and is fixed depending on the value of the property.

There are a whole raft of exemptions meaning that you would only really need to worry about ATED if:

  • The property’s market value is over £500,000
  • You have no intention of letting the property on a commercial basis
  • The property is available for occupation by you or a connected family member

Does Making Tax Digital affect landlords?

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Not currently as Making Tax Digital (MTD) for landlords is not expected to be rolled out until 2021 at the very earliest.

Landlords with gross rental income below a certain threshold will be exempt from MTD. This threshold has not yet been set, but £10,000 was suggested during the consultation process.

If you are caught by MTD then you will be required to:

  • Maintain your business records digitally
  • Submit your rental income and expenditure to HMRC on a quarterly basis; and
  • Make a further submission after the end of the tax year to confirm the final figures

Tax payment deadlines will remain the same, although optional payments can be made on a quarterly basis.

See also:
Which records do I need to keep?

What’s the difference between a joint tenancy and a tenancy in common?

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The main differences arise in how ownership is defined, what happens at death and in taxation.

Definition of ownership

In a joint tenancy, two people (the tenants) own the property as if they were one person. Imagine this as two people jointly owning the same share in a company. No more than two people can enter into a joint tenancy.

In a tenancy in common, two or more people own a share of the property in their own right. Think of this as two people each owning their own shares in a company. A tenancy in common allows more than two people to own a property and gives more flexibility in setting each owner’s share of the property. These shares can be varied by deed at any time.

A joint tenancy can be severed to form a tenancy in common, but once severed it cannot be reinstated.

Death of a tenant

Upon the death of a joint tenant, full ownership of the property automatically reverts to the other tenant regardless of what’s stated in the deceased’s will.

When a tenant in common dies, their share of the property passes in accordance to their will. If the deceased does not have a will then it will pass according to the rules of intestacy.

Taxation

Joint tenants are always taxed on a straight 50:50 split, whether that be profits subject to income tax or gains subject to capital gains tax.

Tenants in common are taxed on their share of profits and gains.

Some complexity arises when tenants in common are married or in civil partnership. In this case they are automatically taxed on a 50:50 split even if their ownership is in a different ratio. In some circumstances this may work to the owners’ advantage but if not, an election can be made to HMRC to tax them in their actual ownership ratio.

Is there anything I should know about choosing an accountant?

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It is surprising but anyone can set themselves up in business as an accountant without any experience or training.

We’re Chartered Accountants and that means we have had to undergo rigorous training and keep our knowledge up to date. It also means we have to maintain insurance and have a professional body to monitor our standards and deal with complaints.

Typically, using a Chartered Accountant will cost more than an inexperienced or unqualified accountant.

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