Transfer of Equity
A transfer of equity means a change in the legal ownership of a property without necessarily the sale of the property itself. Such transfers may take place after a separation or divorce or family relationship breakdown. Sometimes transfers of equity are for other reasons, for example, in the event of the retirement and appointment of a new trustee (where a trust is involved), or it might be beneficial for tax planning.
A transfer of equity can be a fairly straightforward process, since the parties involved will usually have a prior knowledge of the property. There is normally no contract involved and no searches required against the property as there would be on a purchase transaction. However, each transaction needs to be looked at on an individual basis and it is most important that all matters and consequences of a transfer of equity are given proper consideration.
What is required in a Transfer of Equity?
All parties involved will need to agree the terms of the transfer and in what shares each individual will hold the property (i.e. what equity each person will hold). For example a couple could each hold a 50% interest in a property. The property may also need to be valued to establish a ‘current market value’ and the parties will need to agree whether there is a value to be assigned to the share in the property being transferred. The share held in the property by each individual will form part of their estate and they will need to consider whether it is appropriate to make a Will or change their Will following a transfer of equity.
If There Are No Mortgages Involved
If there are no mortgages involved and the terms are agreed, a Transfer will be prepared and signed by all parties and registered at the Land Registry. If the value of the transaction is greater than £40,000 then a Stamp Duty certificate will need to be completed and submitted to HM Revenue & Customs on your behalf.
If There is an Existing Mortgage
If there is a mortgage registered against the property, then the lenders consent may need to be obtained prior to the transfer, or in some cases, the mortgage may need to be paid off (redeemed). Where an existing mortgage will remain and the lender has consented to a new person being added to the title of the property, they will become equally liable for the mortgage and its repayment, along with the other joint owners.
If a party is being removed from the title, the lender will again need to consent to this. The outgoing owner must be released from their obligations under the mortgage. This will usually be done by insertion of a special clause in the transfer, which all parties to the transfer will sign including the lender. The lender will make financial checks to ensure that the remaining owner is financially capable of keeping up with the mortgage repayments.
Where a New Mortgage is Being Obtained
If a new mortgage is being obtained it will need to include the names of all the people who will be joint owners of the property following completion.
Stamp Duty Land Tax
If the value of the transaction is greater than the minimum threshold for paying stamp duty (currently £125,000) and no relief or exemptions apply, then stamp duty may be payable. If the value is under the threshold but greater than £40,000 then no stamp duty will be payable but a Return will still need to be submitted. The value is based on any amount paid by an incoming owner or to an outgoing owner, as well as any amount outstanding on an existing mortgage or borrowed on a new mortgage.
There are many exemptions and factors which affect stamp duty on transfers of equity and we are happy to help with any queries you may have.
Urban Myth: Making a Transfer to Avoid Creditors
Sometimes people consider completing a transfer of equity to prevent creditors from being able to claim some or all of the equity in a property, in the event they become bankrupt. For example, a husband involved in a business may consider transferring a property into his wife’s sole name in an attempt to avoid creditors, if the business is not going well. This is not a good idea. The Trustee in Bankruptcy has powers under legislation to set aside or reverse transfers carried out to avoid creditors, in anticipation of bankruptcy. Once a transfer is set aside by a Trustee in Bankruptcy the trustee will be entitled to the equity in the property on behalf of the Bankrupt’s creditors.
Declarations of Trust
Unmarried couples or friends buying a property together should consider what might happen if a relationship/friendship breaks down.
It is important to consider:
- Who will make the mortgage payments?
- Who will organise maintenance/insurance?
- Who will actually live at the property?
- If the property is an investment property, in what proportion will any rental income be divided?
- In what proportions will any equity be divided, on a future sale?
Inheritance Tax (IHT) and Capital Gains Tax (CGT)
A transfer of equity in a property may have inheritance and capital gains tax implications. If you have any questions regarding this please contact us for further assistance.