19 Mar Transfer of Equity: The process explained
What is transfer of equity?
Transfer of equity describes the legal process used to add or remove someone from the title deeds of property (adding or removing them as an owner). There’s no sale of the property and at least one of the original owners will stay the same. You might transfer equity for several reasons, including:
- The breakdown of a relationship. If you’re separating from your partner, you’ll need to divide up your assets – and the home will often be the most significant one.
- A new relationship. You might have bought the house yourself and later entered a relationship. A transfer of equity could add your new partner to the deeds.
- Buying out the equity of a joint owner. More and more people are buying properties with friends or family. The time may come to buy them out.
- For tax purposes. Home owners sometimes transfer equity to their children or other family members to be more tax efficient. It can be seen as a gift, but always seek advice about your tax liabilities.
When all parties agree on the outcome, equity transfers can be straightforward – partly because there are no searches required as there would be with a sale. But it’s important to look at each transaction individually, as it can become more complicated when mortgages or disagreements are involved.
Transfer of equity examples
If you currently own a property with one or more co-owners, any of your shares could be sold and you could change legal ownership. Equity simply refers to the amount of your home that you own. The transfer of equity could go from a couple to a single owner, for example. Alternatively, you might want to transfer a property from single ownership into two names. To summarise, a transfer of equity could occur when:
- A couple who own a property jointly separate (a transfer of equity from two to one)
- A property owned by one person is transferred into two names (a transfer of equity from one to two)
- An ex-partner is removed from the property title, and replaced by someone else (a transfer of equity from two to two)
The transfer must leave at least one legal owner and a property can’t have more than four owners, but there can be as many people involved in the transfer as necessary. This might occur when removing a partner but adding multiple children.
A current market value may need to be stablished so a value can be assigned to the share being transferred. The shares of what each individual will hold can change depending on your situation – for example, a couple might want to hold 50% interest, whereas a parent might want to transfer more or less to a child.
What are the key stages of a transfer of equity?
Whether you want to add more names to the deeds of a property or remove them, you should seek legal advice. A lawyer can only act on one person’s behalf, so it’s likely you’ll have more than one solicitor involved, especially in the case of a separation. This ensures everyone gets the independent advice they’re entitled to.
But what are the key stages a lawyer will guide you through?
- Review the title deeds.They’ll check a copy of your property deeds from the Land Registry as preparation for the equity transfer.
- Prepare the transfer deed documents.
- Meet with the parties. Once your transfer deed is ready, you’ll meet with the solicitor to sign it in the presence of a witness.
- Notify any mortgage or secured lenders, banks or building societies. If any of these third parties are involved, they must give their written consent.
- Register the deed transfer at the Land Registry. At this point, you’ll have to pay them a fee which ranges from £50 to £920 depending on the property’s value.
What happens when there’s a mortgage on the property?
When a mortgage is involved, as is typically the case, the person leaving the deeds will also need to be released from those terms and conditions. After all, a mortgage is a type of credit agreement. You can’t leave the deeds of the property without sorting out the debt you used to secure it initially.
For clarity, equity is the legal term for the percentage of your property you own. The rest will be owned by the bank. As such, you can’t release it without informing and agreeing with them.
There are a couple of ways you can do this. Which method you use will depend on the circumstances of your transfer of equity:
- Discharge the mortgage with other resources – in other words, pay it off (note: discharging a mortgage also refers to when you refinance or file for bankruptcy).
- Get approval from your lender to transfer the property as part of a buyout – if the co-owner purchases your share of the property, for instance.
- Re-mortgage your property to get enough funds to discharge the existing mortgage and have enough surplus to do a buyout – you might do this if you were separating with a partner to achieve a clean slate.
You can also transfer equity as a gift, although this is less common. The transfer occurs without any money changing hands. For example, parents can gift houses to their children.
Stamp duty tax implications of equity transfers
If you want to transfer property into joint names – after marriage, for example – you could also be charged stamp duty. This happens when the house is subject to a mortgage. Even though no money changes hands, they are taking on half of the mortgage debt. As such, anything above the threshold will be subject to stamp duty land tax. Gov.uk use this example to illustrate:
- The owner of a property valued at £500,000 has an outstanding mortgage of £400,000. When they marry, they decide to transfer half the property to their new partner.
- This means their partner takes on half of the mortgage (£200,000). This is referred to as ‘chargeable consideration’.
- By taking liability for the mortgage, they must pay SDLT on that amount. It’s charged at £1,500 in this example (0% of £125,000 + 2% of £75,000).
- If there was no outstanding mortgage in this case, no stamp duty would be owed.
If you are adding a name onto the title to your property, we highly recommend that a Deed of Trust is put in place to set out the ownership of the property, particularly if you are holding unequal shares. Our trust specialists in our private client team can advise on this further and our equity release team will be able to refer you if necessary.
Don’t worry if you’ve still got questions. Transferring equity can be a daunting prospect for home owners. We’re here to ease any stresses or concerns you might have. Here are some of the questions we get asked most frequently, but don’t hesitate to contact us if you’ve got more.
Does property transfer have tax implications?
The tax implications of an equity transfer depend on the nature of the transfer. There’s currently no capital gains tax charged on transfers to your spouse, civil partner or a charity. Anyone else, including children, and the property is subject to the capital gains tax (CGT). You get an annual exemption of £11,000, and anything beyond that will be charged at 18% or 28%. The tax rate depends on whether you’re a basic or higher rate taxpayer, as well as the size of the gain.
To reduce the CGT, you could transfer the property, or a share, into your spouse’s name to utilise two annual allowances and potentially reduce the CGT. For instance, if you wanted to transfer to a child. This is all something a conveyancer could help you with.
A transfer of equity like this could be treated as a potentially exempt transfer (PET) for inheritance tax (IHT) purposes. The liability only reduces gradually over seven years if the value is greater than £325,000. After seven years, it would no longer form part of your estate.
Is stamp duty payable when transferring property?
It’s advisable to get legal or tax advice before attempting a transfer of equity, especially if your situation is complex. Professional guidance will always make an equity transfer run smoothly, and eliminate any stress for you.
Can you transfer equity to someone under 18?
You will need to set up a trust deed Legally, someone under 18 can’t hold the property but this document allows a trustee to hold it until they turn 18 and the equity is transferred to them.
How Manak Solicitors can help you
Do you have any further questions? How a transfer of equity works depends quite a bit on your individual circumstances. It’s advisable to get legal or tax advice, especially if your situation is complex. Professional guidance will always make an equity transfer run smoothly, and eliminate any stress for you.
Our expert team can help you with all kinds of equity transfer, including:
· When there is or isn’t a mortgage
· If the property is leasehold
· When money is changing hands or if you want to gift shares in property
· Creating a trust
Feel free to contact us for tailored advice. Our conveyancing team will be able to help. We’re always here to act in your best interest.