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Pitfalls of Co-Ownership and How To Avoid ThemDate: 23/11/2023 Type: Articles Topic: Private Client | Investment and HNWI’s |
A key issue that arises across legal disciplines for HNW families and individuals relates to property interests and their protection, as well as disputes that arise when an interest has not been properly protected. Often this occurs when one person is gifting a sum of money or property to another, but also where people are purchasing jointly or providing contributions to a property owned by another.
While the legal title is the first consideration for determining property ownership, it is not always determinative. There can be scenarios where somebody legally owns a property, but another person has developed an interest in it. Further and particularly when gifting generational wealth, tensions can arises where for example a couple both want to legally own the property, but one person’s family is putting in funds and wish to ensure these stay in their family in the event of a separation.
The best way to avoid a dispute is to clearly set out interests upon purchase. This can be done with a Declaration of Trust. This will set out fundamentals such as the ownership split, but can also address matters which are often contested such as how contributions to the repair or improvement of the property should be taken into account, and the payment of outgoings. This would set out the expectations for all parties and avoid the risk of ending up in a dispute in the future if one person feels they have contributed enough money that they should obtain an interest.
Something to watch out for with joint purchases is unequal contributions. This could be because someone has greater wealth, or they are being gifted money from family. Often people purchasing together, especially during a relationship, agree to simply hold as joint tenants and do not understand or do not consider the impact this will have. No matter the differing contributions to the purchase price, if they agree to hold as joint tenants (or tenants in common in equal shares) and tick the transfer deed to confirm that, this will be considered an express declaration of trust and will be very difficult to override except in limited circumstances.
This is something that family, private client, and conveyancing solicitors all need to be aware of as they may be registering a purchase or transfer, or asked to advise on declarations of trust. All too often people believe the other party will be sensible or abide by what is ‘fair’ on any future sale and do not appreciate the legal impact of co-ownership. They are often then sadly either in litigation or have to accept the loss of funds that could have been avoided.
With the changes in the law bringing in registration of trusts, it is more important than ever to consider the tax implications of agreements. While properties with the same legal and beneficial owners do not have to be registered currently, if the legal and beneficial owners differ they now must be registered with HMRC. Tax advice before entering into any agreement is therefore vital.
Something to consider if the owners of the property intend to marry is that while Declarations of Trust are legally binding, they can be overridden by the family court upon divorce. While a Declaration of Trust confirming ownership with a third party is usually respected, if a couple own unequal shares the family court can nevertheless make orders granting one person a greater share of the equity, or even transferring it to them entirely. A Declaration of Trust would be a relevant factor but ultimately a Judge has discretion to make orders that they consider fair, leaving a wide remit. If marriage is intended, it would be sensible for any clients wishing to protect this money to enter into a pre-nuptial agreement. While nuptial agreements are not entirely binding upon divorce, they are a strong factor and are increasingly likely to be upheld if procedural requirements are followed and each party’s needs are met.
So what happens if your client has not taken these steps?
If ownership is disputed, there can be a claim under the Trusts of Land and Appointment of Trustees Act. Here one person would be arguing that because of money they had put into the property, they were entitled to a greater interest than they had legally. This would generally be by showing that there was a constructive trust created by the parties’ common intentions. This may not be an express intention but can be inferred. It is important to appreciate that once a constructive trust is found the Court can consider the whole situation including factors like payment of outgoings, rather than simply contributions to the property. This means the dispute can become broader than who paid towards the property, and is why it is important that any agreement considers these issues. Of more limited impact but still relevant are resulting trusts, where the likely outcome would be an interest limited to the amount paid into the property.
Something we are increasingly seeing as a cause of disputes, is where during the conveyancing nobody has ticked the ownership box on the TR1 form, meaning there is no express declaration of ownership. This is a risk to parties who do not have certainty over the property ownership, as well as the conveyancers who do not spot this if it leads to a costly dispute. It is key to check this first, as the completed TR1 in most cases will end the dispute at that point.
Practical steps that can be taken to protect an interest include putting a restriction on the title. However, if this is not agreed by the owner, this in itself could commence proceedings. A little known provision of the Land Registration Act 2002 means if someone tries to enter a restriction asserting an interest which is challenged, the Land Registry will refer the dispute to the First-Tier Tribunal. This means that in trying to protect an interest, parties or legal advisors may unwittingly commence proceedings.