Owning property with others and going your separate ways

Property is commonly owned by more than one person – jointly owned with your spouse, a business associate or another family member, or held in partnership. But what happens if you want to change these arrangements? Below we outline some common questions and areas you may need to consider.

Is it possible to go our own way and not own property together?

Absolutely. We are seeing an increasing number of clients looking to simplify their affairs, divide up assets or free up cash to spend or invest elsewhere.

Will there be tax to pay?

Possibly, but it might not be as costly as you think.

There could be capital gains tax (CGT) and stamp duty land tax (SDLT) implications of splitting up joint ownership or a property partnership, but this will depend on:

• The structure of the property business: is there a partnership or is it simply jointly held property (tenants in common or joint tenants)?
• The structure of the deal: are you buying out your joint owner’s interest for cash consideration, giving property in exchange for their interest or swapping interests in jointly held property so you each walk away with property in your sole name? Will there be any equality payment or any debt to consider?

Capital gains tax

The transaction may be treated as a disposal at market value. This can lead to a significant gain arising if the asset has been held a long time or increased in value. However various forms of holdover relief may be available where business/agricultural property is gifted, where property is distributed to one or more partners in a partnership or individual taxpayers swap interests in property. In such cases, some or all of the gain may be deferred until the asset is ultimately disposed of by the recipient.

Even if there is ultimately no taxable capital gain, computations will need to be prepared and any available reliefs claimed.

If a liability is due, a disposal of UK residential property will need to be reported (and the tax paid) within 60 days of completion. 

Stamp duty land tax  

SDLT is a tax on land transactions in England and Northern Ireland (different rules may apply in Wales and Scotland). SDLT is payable by the purchaser within 14 days of the effective date (usually completion), by reference to the amount of consideration paid. Consideration could be cash, property given in kind, or debt assumed by the transferee.

The amount of SDLT due will depend on factors such as whether the property is residential or non-residential (including mixed-use), whether the 3% surcharge applies and whether any reliefs such as multiple dwellings relief (MDR) may be claimed.

Special rules exist to determine the amount of chargeable consideration for SDLT in certain situations, such as:

• An exchange – where two or more properties are swapped between parties who had no prior interest in the property they acquire
• A partition – where interests in jointly held property are transferred such that each party walks away with an absolute interest in one or more of the properties. Often the chargeable consideration for a partition will be restricted to any equality payments made
• Someone leaving a partnership – there are special rules for partnerships which can limit exposure to SDLT, but the rules are complex and must be carefully navigated

What if I decide to reduce my share, rather than exit entirely?  

Tenants in common are able to hold property in unequal shares, but not joint owners (who cannot gift their share).

Giving up a fractional share in a property will still be a chargeable disposal for CGT. Consideration of the partnership rules will be required if this is partnership property.

Any changes in ownership proportions for individuals, or profit-sharing ratios within a property investment partnership, may attract SDLT at the time of the change. 

How do I know if there is a partnership for tax purposes?

In some cases this will be obvious, however the position is not always clear in relation to property partnerships. It is not as simple as having a partnership agreement. The key questions are whether there is an active ‘business’, and whether it is carried on by two or more persons in common with a view to profit.

It is important that the starting position is clear so the tax impact of any changes can be properly evaluated.

Will there be an inheritance tax (IHT) impact?  

Properties will fall within your estate for IHT purposes, but some types of property may achieve 100% relief (e.g. business or agricultural property) so advice should be sought to understand IHT exposure before and after.

If you are making a gift, then this may be entirely exempt from IHT if you survive seven years from making the gift. There would also be no IHT impact if equal value is given and received.

Anything else to consider? 

A solicitor will be required to deal with any legal paperwork. Will a SDLT return be submitted or is an explanatory letter required to be sent to Land Registry?

New capital gains tax rules are coming into force for divorcing couples from 6 April 2023 so specific advice should be sought by separating couples.

When making any changes, it is also worth considering if any updates are required to your will, inheritance tax or financial planning.

The office of tax simplification published a report into the taxation of property income on 1 November 2022. They recommended a number of areas for review, including in relation to jointly held properties so there could be further changes which could impact on tax planning options for property ownership.

The tax rules in these areas are complex but we can guide you through your specific situation and explain how your aims can be achieved in the most tax efficient way.