Tenancy contracts can help beat taxation traps

Cohabitees whose names are both on the deeds to a property need to engage in a little forward planning to beat the tax traps waiting for them.

But first they should start with the basics: decide on the type of tenancy agreement; make a will; and sign a contract that spells out what will happen if it all goes wrong.

Obtaining legal advice on these matters should be a priority for non-married couples, says Ms Kerri O'Connell, taxation manager at Hamill Spence O'Connell.

If a person dies without leaving a will, often a surviving cohabitee won't be faced with the problem of how to pay the inheritance tax bill since they may not inherit at all. At least, this is what happens if cohabitees signed their purchase agreement as tenants-in-common rather than joint tenants.

Instead, the share of the property will revert back to their estate under succession law, usually to the deceased partner's parents, who could force a sale. "The surviving partner would get half the proceeds, but the question is, would that be enough to buy property now?" asks Ms O'Connell.

Married couples buying property in both names almost always do so as joint tenants, which means if one of them dies without making a will, full ownership of the property automatically reverts to the survivor.

But solicitors typically advise non-married couples to buy as tenants-in-common, meaning each partner owns his or her share absolutely.

A will covers what will happen to the property should that one partner die, but Ms O'Connell advises cohabitees to make a side agreement, in addition to the purchase contract, that will set out what will happen if the relationship breaks down. For example, one partner could agree to buy the other's share at market value, if that is possible, or they could agree to sell and split the proceeds.

Signing such a contract is, in emotional terms, the cohabitee equivalent of a pre-nuptial agreement. Long-term cohabitees might balk at the idea, feeling that to start talking about the financial consequences of a break-up could seem like a lack of faith in the durability of the relationship.

But such agreements "cover all eventualities", says Ms O'Connell. There's no harm in being conservative when it comes to legal protection of your assets.