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There are two ways by which more than one person can own a property, either as:

1. "Joint tenants" - whereby each is deemed to own an equal share (e.g. three "joint tenants" will be entitled to a third share of any income or capital gains arising from the one property). When one owner dies the property is automatically transferred to the other "joint tenants" in equal shares and none can sell their share without the others permission. The legal rights of the surviving parties to a "joint tenancy" override a will even if the will explicitly leaves the deceased's share to someone else. Whatever the beneficial ownership proportions by which the parties have actually contributed to the purchase price, and/or to the maintenance of the property or mortgage, the legal presumption is that any proceeds of sale will be divided equally.  
2. "Tenants in common" – whereby the share of each owner is separate, may be unequal and can be disposed of as the respective owner wishes.

Two or more unmarried persons may own property under either method as "tenants in common" is more usual. The "default position" of property ownership by spouses/civil partners is as "joint tenants".

With a property owned by unmarried parties, or held within a partnership business proper, the tax follows the beneficial ownership rather than legal ownership. Therefore owners can agree a different split as they see fit, the proportion referring to profits and losses only and not necessarily to the capital received should the property be sold.

By default, rental profit from property jointly owned by spouses/civil partners is taxed 50:50 irrespective of the underlying respective proportion of legal ownership (although this does not apply to property held within a business partnership proper). If it would be more tax efficient for the split of profit to be different, then the profit may be divided according to the actual legal ownership. Such unequal ownership is achieved only as "tenants in common". HMRC is notified of the revised proportions via submission of a form 17.

Once HMRC has been notified the new proportions remain in force until the couple's legal interests in the property change, or one spouse/civil partner dies or they stop living together.

Regardless of how the rental income is treated for income tax purposes it is the underlying legal ownership that determines the Capital Gains Tax treatment. A transfer of legal interest from one spouse to another is a CGT disposal. Although unlikely to trigger a gain by virtue of the 'no gain/ no loss' rules there may be consequences when the property is finally sold.

Written by Jennifer Adams for Tax Insider

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