I bought a flat with my friend from university back in 2017 with the agreement that when one of us wants to sell the property, it must be sold.
My girlfriend moved in with me last year and this summer we decided we would like to buy our own place together.
However, my friend has refused to sell on the grounds that he can’t yet afford to buy a similar property in the same area. I know I have legal grounds to force him to sell but I am worried that this could be a lengthy and costly process.
Broken friendship: Buying a home with a friend can be a great way to get on the property ladder, but can lead to complications when you come to sell.
My girlfriend and I have decided to move out and rent in the hope the situation will improve. We are also renting out our room to cover our costs for repaying the mortgage.
I would like to know what legal steps would be required if he refuses to sell in the future. Can we force the sale and how long will it take and will we end up having to pay for the legal fees?
What if my friend continues to refuse to leave and prevents the property from selling? What if he changes the locks?
We are also concerned about our tax position. We did a loft conversion last year and I think the property would have increased in value since we purchased it. Could we become liable for capital gains tax when we come to sell if we continue to live away from the property?
Ed Magnus of This is Money replies: This is an ugly situation you find yourself in. A lot will depend on the legal agreement you have in place with your friend.
If your friend won’t agree to sell the property, you can try to force a sale – but as you say the process could be both time-consuming and expensive.
Forcing a sale, if it comes to it, will mean getting a court order. Going to court will typically be a long and drawn-out process and will require a solicitor to be involved.
Hopefully, you will have signed a Declaration of Trust when you both purchased the property.
This is a legally binding document which will show the financial arrangements and intentions agreed between you as joint property owners at the time of purchase.
If you have written an exit clause into the Declaration of Trust, this can make things easier if a sale does need to be forced.
Written request: If a co-owner is refusing to sell, the person who wishes to sell must formally write to them to ask them to either buy them out or sell the property and set a deadline
You are also right to query the capital gains tax implications. When you sell your main home (the one you live in), you are entitled to something called Principal Private Residence Relief (PPR), which should, in most cases, shield you from capital gains tax.
However, by leaving the property and renting elsewhere you could lose this tax relief and potentially become subject to capital gains tax. It depends on how long you end up renting for and how much the property has increased in value since you purchased it in 2017.
On residential property, capital gains tax is currently charged at 18 per cent for basic rate taxpayers and 28 per cent for higher rate taxpayers. This is charged on any house price gains since purchase.
That said, everyone is entitled to an annual capital gains tax allowance, which currently means the first £12,300 of any realised gain is tax-free.
To further advise on the matter, we spoke to Stephen Bottomley, a partner in dispute resolution at RHW Solicitors, Nigel May, an independent tax consultant, and Gary Rycroft, a member of the Law Society’s council membership committee and a consumer law expert.
Can they force a sale?
Stephen Bottomley replies: In the first instance, it would be helpful to know whether the agreement to which you refer was written or oral – although this will not necessarily be determining factor.
We would also need to know how the property is currently owned – either as joint tenants or tenants in common.
The short answer to your question is that you cannot force the sale of a jointly owned property without an ‘order for sale’ from the Court.
If the property is owned as Tenants in Common, then you may be able to sell your share to a third party – or indeed your friend if they can secure a mortgage for your share.
If the property is owned as joint tenants, you would first need to sever the joint tenancy and notify the Land Registry.
What if a Declaration of Trust was signed?
Gary Rycroft replies: It’s brilliant if you and your friend thought about what may happen in the future when you originally bought the flat, and put in place a mechanism for a sale to happen when one of you wants to invoke it.
That legal document is evidence as to the nature of the so-called ‘trust of land’ when you bought the flat and will be the basis of your claim in law for the trust to come to an end, either by way of your co-owner buying you out or selling on the open market.
The document may even set out how you would go about selling, or one person buying the other out.
However, regardless of whether it includes such details, if your co-owner is not playing ball, you must formally write to him to ask him to either buy you out or sell the property, and give him a tight deadline to agree.
This is all rather sad when he is your friend, but friends should respect your right to have your capital to get on with your life
If he does not, and you want to assert your legal rights, the forum for that is the court. You would need to issue a claim under the Trusts of Land and Appointment of Trustees Act 1996, often called Tolata for short.
It is not a quick process and the way to try to force his hand is to threaten court action and also say if you win you will claim your costs from him.
This is all rather sad when he is your friend, but friends should respect your right to have your capital to get on with your life.
What will forcing a sale through the courts entail?
Stephen Bottomley replies: When considering whether to grant an order for sale, the court will have to consider various factors, including whether the property in question is the home to any children under the age of 18. It is unclear from the details provided in your question if this is the case.
If you are unable to resolve matters with your friend informally and court proceedings are required, the process can be drawn out and stressful. Costs can also risk becoming disproportionate.
That being said, if you were to be successful in obtain an order for sale, the Court has the discretion to award you your costs.
If a party is awarded its costs on the ‘standard’ basis, they could reasonably hope to recover 70 per cent of the costs spent.
If your friend refuses to vacate the property following the making of an order for sale, you will likely require further involvement of the court or, if necessary, bailiffs. This action will further increase your legal costs.
What if the friend changes the locks?
Gary Rycroft replies: As a co-owner you have just as much right as your ‘friend’ to gain access to the flat.
He should not change the locks unilaterally and if he does it will be a factor to include in the court application and it will be further reason for the court to take a dim view of him.
Will they incur capital gains tax if renting elsewhere?
Nigel May replies: Main residence relief applies to a property that you occupy as your only or main residence.
Where you own two or more properties that you occupy as your main residence, you are permitted to make an election as to which of the properties is your main residence, however, this presupposes that you have two or more residences.
In the present case the questioner explains that he and his girlfriend intend to rent.
Whilst the property that they will occupy will have little or no capital value, it would seem unlikely that they could view the co-owned property as remaining their main residence.
Where a property has been your main residence at any time during your period of ownership, the final nine months of ownership will be treated as exempt from capital gains tax (CGT).
Tax bill: Capital gains tax can be charged on any profits you make on a property that has increased in value when you come to sell, unless it remains your principal private residence
So if we were to assume that the questioner was to move out on 1 October 2022, the period from acquisition until 1 October would be exempt due to occupation as main residence and if the property were to be sold prior to 1 July 2023, because of the nine-month rule, no CGT would be due.
After that, CGT would arise but on a time-apportioned basis. The questioner will have his CGT annual exemption of £12,300 available on the basis that he has no other gains.
Hopefully this will mean that CGT does not become an issue for some time from a viewpoint of having to pay tax.
Care should be taken, however. If there is tax to pay there is a requirement to make a return within 60 days of completion of the sale.
Gary Rycroft adds: Once a person has moved out of their principal private residence and it is sold, the final 9 months of ownership count for tax relief even if you are no longer living there.
So this is a further incentive to sell forthwith and not indulge your ‘friend’s’ unreasonable behaviour any longer.
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