Stockport based Fairhurst Estates recently examined the advantages and disadvantages in owning freehold and leasehold property. But where does Shared Ownership fit into the mix?
In their latest review, Fairhurst are looking the options available if you don’t want to go it alone when buying a property, and what you need to consider when looking at a shared purchase.
The purchase and ownership of property by a company or business partnership is a very common model of shared ownership. Many commercial and residential developments are owned by companies, meaning no named individuals have rights to the property.
Many of the pros and cons associated with company ownership of property are linked to tax liabilities. Because corporation tax is lower than income tax, less tax is paid on rental income if a property is held in a company’s name than if it is owned privately. Profits can also be accessed via share dividends without incurring National Insurance contributions. However, the flip side comes if the property is sold, as receipts for a property owned by a business would be liable for capital gains tax.
Joint ownership describes any scenario where two or more individuals come together to buy a property together privately, as opposed to purchasing in the name of a company. Joint ownership can apply either to freehold or to leasehold purchases. There are two types of joint ownership:
- Joint Tenancy: A joint tenancy confers equal rights to the whole property on all named buyers. It is therefore logical that all partners should contribute to the purchase equally – otherwise, in the event of one party wanting to sell their stake, someone who contributed a smaller portion to the original purchase would still be legally entitled to a higher slice of the property value. Similarly, a larger contributor would only be entitled to a smaller share.
- Tenancy in Common: This form of shared ownership allows for different parties to hold different value stakes in a property. There are lots of different models of TIC, such as Space-Assignment Co-ownerships, which give different parties ownership over specific allocated space in a property, and Equity Shares, where some parties get usage rights to the property, while others are purely investors.
A critical difference between joint tenancy and TIC is so-called succession rights. In a joint tenancy, your fellow investors have first claim on your portion, so in the event of you passing away, your share would pass to them. TIC, on the other hand, gives individuals the right to pass on their share in their will, making many people see it as more suitable model for private investment than joint tenancy.
Introduced in 2004, Commonhold is a relatively new concept in British law. Its main purpose is to give tenants and leaseholders in a multi-occupancy site a route to purchasing their particular unit. As a form of freehold, each purchaser in a Commonhold agreement would own their own portion of the property outright. However, as the freehold to the shared areas of a building and the land it is on is also purchased, a company called a commonhold association has to be formed to take responsibility for this shared management, with each member holding an equal stake.
Aimed at tenants rather than property investors, commonhold is still uncommon in practice, especially in commercial property, where it is rare for all occupiers to want to own the freehold to their unit, and costs can be prohibitive.
With thanks to the team at Fairhurst Estates for their insight into Shared Property Ownership.