Wills, Property Ownership & Declarations of Trust: Part I
Article by Janine Byrne
www.Draft-Your-Will.com

Introduction

For the majority of people, the 'home' is the most valuable asset they own. If only one person own the title to a particular property there is no confusion about how the property is owned - that person owns title to the said property absolutely. However, where more than one person owns the property - namely couples (whether married or unmarried) - confusion sets it.

Whenever I ask couples making a Will 'Do you own the property as joint tenants or tenants in common?' I am usually met with blank confused expressions. The most information the majority of couples are able to provide is that they own it jointly, and are unaware that there are two kinds of joint ownership with differing implications and consequences, particularly when making a Will.

This article is divided into two parts;

The Distinction Between Joint Tenancy & Tenancies in Common

Beneficial Joint Tenants
Where property is owned as beneficial joint tenants, this means that both parties own the property and any proceeds of sale jointly - both parties own the whole thing. Neither party has a separate share to sell or leave to somebody else in a Will. When one party dies, their ownership in the property automatically passes to the surviving party, irrespective of any provisions which may have been set out in a Will.

Example:

Jack and Jill own their property as beneficial joint tenants. Jill makes her own will in which she includes a provision which reads; "I leave my share in the property XYZ to my best friend Kathleen to do with as she sees fit." Two years later, Jill then dies.

Kathleen does not receive Jill's 'share' in the property because Jill did not have a separate share to dispose of, it automatically passes to Jack. The gift to Kathleen will fail.

The Will itself remains valid (providing it complies with all legal requirements) but the above clause does not. The surviving beneficial joint tenant will acquire the deceased party's share with no further formalities; the transfer is automatic.

This is the most usual form of ownership for married couples. However, this type of joint ownership might not be suitable for all married couples, civil partners or cohabitees, and changing the type of joint ownership may prove to be a beneficial planning tool when avoiding inheritance tax.

Tenants in Common
Tenancy in common is still a form of joint ownership, but in contrast to beneficial joint tenants, each party has a distinct share of ownership in the property. Thus, they might own the property in equal or unequal shares depending on the agreement reached between the relevant parties. Thus, if one party dies, their share does not automatically pass to the surviving party. Instead, the share will pass in accordance with the rules of intestacy or according to the provisions of the deceased party's will. Thus, it is vitally important where property is owned as tenants in common that a Will is made by both parties.

Example:

Jack and Jill own their property as beneficial tenants in common in equal shares. Both parties make their own Wills. Jack in his Will leaves his share of the property to Jill. Jill leaves her share of the property to her friend Kathleen.

If Jack is the first die, his share will pass to Jill which means that Jill will then own the entire property outright. If  Jill then dies without making another Will, her share in the property will pass to her friend Kathleen. However, Jack's share of the property which she inherited will fall into the residue of her estate, as she never updated her Will to dispose of  or deal with this particular share.

Thus it can be seen that joint ownership as tenants in common can be a useful vehicle for saving inheritance tax. Lets look at a simple example. The example assumes that the inheritance tax nil rate band for every individual is £250,000. For simplicity, the example will assume that the property is the only asset in the estate.

Example:

Jack and Jill own their property as beneficial tenants in common in equal shares. The value of the property is £500,000. Jack in his Will leaves his share to his son Frank from a previous marriage. Jill in her Will leaves her share to her friend Kathleen.

Jack dies and his share passes to his son as per his Will. There is no inheritance tax to pay on this disposition because the share falls within Jack's annual nil rate band entitlement of £250,000.

Jill dies and her share passes to Kathleen. There is no inheritance tax payable on this disposition either as the value of her share of the property falls within her annual nil rate band entitlement.

Thus, Jack and Jill avoided paying any inheritance tax on their property simply by owning it as tenants in common and including provisions in their respective Wills to distribute their share. Of course, the reality is no way near this simple but the principle is illustrated.

It is also advisable where property is owned as tenants in common that there be a document which sets out the nature of the ownership, namely the shares in the property and how the proceeds of sale should be divided. Such a document is called a 'Declaration of Trust' and will be examined further in Part II.

Discovering What Type of Ownership You Have

As pointed out above, the majority of couples do not know what kind of ownership they have. So how do you find out? The answer is to check the title deeds to the property. These can be retrieved from the HM Land Registry http://www.landregisteronline.gov.uk/.

Much of the property in England and Wales is now registered (as opposed to unregistered). Once you have a copy of the register, you will need to look under the 'Proprietorship Register' under which you might find an entry reading something similar to the following;

"No disposition by a sole proprietor of the land (not being a trust corporation) under which capital money arises is to be registered except under an order of the Registrar or the Court."

If this entry is present, then you own the property as tenants in common, otherwise the property is owned as beneficial joint tenants.1

Changing Ownership

The virtue of owning a property as tenants in common is particularly well illustrated where a couple wants to engage in inheritance tax planning (see above example). Even if no inheritance tax is payable, this form of ownership allows for more flexibility in the choice of beneficiaries, whereas a joint tenancy only allows for a surviving partner to inherit. There are two procedures to be followed to change a beneficial joint tenancy to a tenancy in common and the choice of procedure depends on whether the property is registered or unregistered (see below2).

The majority of property in England and Wales is registered. To affect a change from beneficial joint tenants to tenants in common, a Form A Restriction will need to be registered with HM Land Registry. Completion of the Land Registry Form RX1 accompanied by a Notice of Severance  will give affect to the change and the form can be downloaded free from the Land Registry site. In the section which details the type of restriction you wish to register, simply enter - " No disposition by a sole proprietor of the registered estate (except a trust corporation) under which capital money arises is to be registered unless authorised by an order of the court."

Once completed the form will need to be sent to the Land Registry via the relevant district (these can be found from the site). No fee is payable for the registering of a Form A restriction. For any other type of restriction, a fee of £40 is payable.

Conclusion

Thus, by following the procedures whether for registered or unregistered property, the nature of the joint ownership is changed. However, it must be stressed that whilst the ownership is altered, the arrangement which the parties ultimately enter into regarding how they share the property is not regulated by these procedures. Such an arrangement is regulated by a Declaration of Trust which is covered in greater detail in Part II.

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1 Unregistered property is now becoming very unusual as all new properties which are bought and sold are now registered. However, some older properties may not yet have been registered. Thus, in order to find out what kind of ownership you have where the property is unregistered, you will need to have a look at the original conveyance whereby there should be a clause which states that the property is conveyed "........as joint tenants" or "..........as beneficial joint tenants" or ".....as tenants in common" to the purchasers. Back

2. One party serves notice on the other party that they no longer wish to own the property as beneficial joint tenants but as tenants in common instead. The notice need not be in any particular form provided that the intent is clear and that the other party counter signs the document to demonstrate agreement. Once this has been done, a note (Memorandum) should be written on the conveyance detailing that there has been a change in ownership (severance of joint tenancy). Wording along the lines of  the following could be used;

Memorandum
By a notice of severance dated the [   ] day of [   ] 2006 and made between [   ] the parties to this conveyance the parties declared that they would henceforth hold the property comprised herein and the net proceeds of sale thereof upon trust for themselves as tenants in common. Back

Janine Byrne holds a Bachelor of Law degree with Honours & a post-graduate diploma in Legal Practice. Also gained qualification in Wills Writing & is the owner/author of www.Draft-Your-Will.com