Transfers of Equity

Partner Melanie Verth

Residential Property Partner Melanie Verth writes on Transfers of Equity.

Transfers of Equity are increasingly popular in today’s property market and occur for many reasons. This type of transaction is a mechanism by which the legal ownership of a Property is altered. It can be used for many reasons but in general the most common are:

  • To add a spouse or partner to the legal title to a Property
  • To remove a spouse, ex spouse, partner or ex partner from the legal title to a Property
  • To take advantage of tax advice which may have been obtained in relation to assets

What is equity?

Equity is a legal term that explains the value within a Property which is ‘owned’. The equitable value is the value of the Property less any liabilities secured on it, for example any mortgage.

For example, if the value of your Property was £500,000 but you had a mortgage of £300,000 outstanding and registered against the title to the Property, then the equity held would be £200,000.

If the Property is held by more than one person and the Property is held in equal shares then the equity would be split equally. Alternatively, if held in unequal shares the split would be as per any trust agreement. 

It is important to consider the equity within a Property prior to proceeding with any transfer as this will have an effect on the process and potential Stamp Duty Land Tax (SDLT) liabilities.

Forms of Transfer of Equity

Transfers of Equity are common when a couple marries and/or moves in together. Conversely, Transfers of Equity can be common if couples divorce and/or split up. 

In either situation, the Transfer of Equity allows the parties to change the ownership of the title to a Property to reflect the new ownership. The process can be seen as one person ‘buying’ the others share in a home or ‘selling’ a share that they own to allow another to hold the Property with them. Although the terms buying and selling are commonly used it can also be that a party ‘gifts’ a share of the Property to the other. This may mean that no monetary value changes hands.

Both forms of Transfer of Equity will require consultation with any existing lenders and require a Land Registry transfer document to be executed. The process can be misconceived as simple when there is a lot to consider and possible consequences to any decision made.

Process of a Transfer of Equity

There is a substantial amount of legal work involved in a Transfer of Equity and issues that must be considered before proceeding. If either party proceeds without the correct legal advice then this can have detrimental effects.

The first part of the process will be to consider the equity value of the Property and any payment needed for the Transfer of Equity. Mortgage lenders, if any, will then need to be contacted to consent to the Transfer before completion of the transfer, payment of SDLT and registration.

If the Property is not subject to a mortgage then the transfer may be fairly straightforward especially if the share in the Property is being gifted from one party to another. If a transfer for payment is being made the value of the money changing hands will need to be considered and SDLT payments made if applicable. It is advisable to obtain advice in relation to any transactions where money will be paid to ensure that the SDLT liability is considered in full.

Where there is a mortgage registered against the Property then any Lender will need to consider the transaction. The different types of Transfer of Equity may be affected as follows:

  • If a new party is being added to the title to the Property then the mortgage lender will usually insist that the new party becomes equally liable for the mortgage. This is something that will need to be considered by the Lender and also the incoming party.  
  • If an owner is being removed from the title deeds then the outgoing person will want to be released from their obligations under the mortgage. The Lender will want to be certain that the remaining party is financially capable of meeting the repayments on the mortgage. This may lead to the Lender requiring guarantors or refusing to give consent to the release of the outgoing party which will mean that the Transfer could not proceed without a new mortgage being obtained. 

Once the consideration, relevant consents or new mortgage have been finalised the transfer of the Property will take place by way of a Transfer Deed which will give details of the existing and new owner(s), consideration and any other terms. The Deed is then signed by all parties along with any new Mortgage Deed or release. The Transfer can then move to completion where the money is transferred between the parties and the Deed is dated.

SDLT Considerations

Much to the surprise of many parties to Transfers of Equity SDLT can be payable not only at the standard rate but also at the higher rate if applicable. SDLT is calculated using relevant bands.

Liability for SDLT much depends on the set up of the transfer itself and the consideration concerned. This is why it is important to consider this at the outset.

  • If a new party is being added to the title to the Property then the following will apply:
    • If the Transfer of Equity is a gift and the Property is not subject to a mortgage then no SDLT will be payable
    • If the Transfer of Equity is made in consideration of the incoming party taking on a half responsibility for the existing mortgage with a part gift of remaining equity; SDLT will be payable (if over relevant thresholds) on the value of half the outstanding mortgage
    • If the Transfer of Equity is made in consideration of the incoming party taking on a half responsibility for the existing mortgage with a payment being made for the remaining equity to the existing owner; SDLT will be payable (if over relevant thresholds) on the value of half the outstanding mortgage plus the additional payment
  • If a party is being removed from a title to the Property then the following will apply:
  • If the Transfer of Equity is a gift and the Property is not subject to a mortgage then no SDLT will be payable
  • If the Transfer of Equity is made in consideration of the remaining party taking on full responsibility (being an additional half) of the existing mortgage with a part gift of remaining equity; SDLT will be payable (if over relevant thresholds) on the value of half the outstanding mortgage
    • If the Transfer of Equity is made in consideration of the remaining party taking on full responsibility (being an additional half) of the existing mortgage with a payment being made for the remaining equity to the outgoing owner; SDLT will be payable (if over relevant thresholds) on the value of half the outstanding mortgage plus the additional payment
  • If the Transfer of Equity is made in pursuance of a Court Order or Agreement due to Divorce or Separation then no SDLT will be payable.

Conclusion

It can be seen that a Transfer of Equity for whatever reason can be fraught with potential issues and the best time to consider the best way in which to proceed is prior to any agreement taking place. We can help guide you through the process and give the best advice as to how to proceed.

You should also be aware that any Transfer of Equity can have subsequent effects on tax liabilities for either party which may also warrant specialist tax advice. Depending on the nature of any tax advice you require it may be that one of our Private Client Lawyers can assist, or alternatively you may wish to consult a specialist accountant. 

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