What is Transfer of Equity?
A Transfer of Equity refers to the process by which one or more people are added or removed from ownership of a property and one of the original owners remains on the legal title after the Transfer of Equity is completed.
Below we examine the meaning of ‘equity’, the circumstances in which you might want to initiate a Transfer of Equity and the process by which this is achieved.
What Is ‘equity’?
Equity represents the residual market value of your property having deducted any outstanding balance on your mortgage. By way of example, if your home is currently valued at £300,000, with outstanding lending of £150,000, you will be left with £150,000 equity in that property.
Consequently, if the value of your home increases, this will positively impact upon the existing equity, and vice versa, where the value of your property decreases this will adversely affect any equity. A ‘negative equity’ situation is where your outstanding mortgage balance exceeds the current market value of your property.
If you are seeking a Transfer of Equity, you will be transferring the equity in the property, not the overall market value of the property.
When might you seek a Transfer of Equity?
There are various different circumstances in which you might seek a Transfer of Equity. These include:
- adding a new spouse or civil partner
- removing an outgoing spouse or civil partner on separation, divorce or dissolution of the civil partnership
- adding a new cohabitee when setting up home together as an unmarried couple
- dividing up jointly owned property as an unmarried couple or as other joint owners
- adding a close relative, for example, a son or daughter, to reduce any inheritance tax liabilities or to take advantage of personal capital gains limits.
The Transfer of Equity process
Whilst it is prudent to seek legal advice and guidance for any type of property transaction, by understanding the Transfer of Equity process this will help you to understand what work is being undertaken on your behalf.
The process for initiating a Transfer of Equity can vary depending on the individual case and type of transfer, for example, where there are single or joint owners, or whether or not a property is subject to a mortgage. However, the basic steps involved in a Transfer of Equity are examined below.
The title deeds
The starting point for any Transfer of Equity is the Official Copy of Register of Title for the property held by HM Land Registry. This document provides all the particulars relating to ownership of a property, the manner in which it is owned and precisely what is owned. It will also set out any covenants, easements, restrictions and charges affecting the property and its ownership, including any mortgage.
The ‘Deed of Transfer’
Following a review of the title deeds, and having established the nature and extent of ownership of the property, your legal adviser will prepare the ‘Deed of Transfer’. This is the official document necessary to legally effect the Transfer of Equity’. This will need to be signed by all parties in the presence of a witness.
The mortgage lender
If the property is mortgaged and you wish to retain your existing mortgage, you will need authorisation from your mortgage lender to go ahead with the Transfer of Equity. Any new co-owner will become jointly and severally liable for the mortgage. As such, they will need to pass any eligibility and affordability checks with your lender.
Equally, if you are removing someone from the title, their mortgage liability will pass to the remaining owners of the property.
Alternatively, you may be looking to settle your existing mortgage and remortgage with a different lender. This could be an option in the event that your existing lender refuses to authorise the Transfer of Equity.
Your legal adviser will be able to deal with any mortgage formalities. If the property is not subject to a mortgage then, needless to say, the process is more straightforward.
Stamp Duty Land Tax
Any new co-owner may be liable to pay Stamp Duty Land Tax (SDLT) following a Transfer of Equity as they will be acquiring a share in the legal ownership of the property.
SDLT is charged on the amount of ‘consideration’ given, not the amount of equity. SDLT will fall due if the consideration given in exchange for the share transfer is more than the current threshold for the property type. In England the SDLT threshold is £125,000 for residential properties and £150,000 for non-residential, or mixed use, land and properties.
Where SDLT does fall due, it will be payable at the prevailing rate on any consideration over and above the threshold. The rate is currently set at between 2 to 5% depending on the value of the consideration.
By way of example: for a property valued at £200,000 with a mortgage of £100,000, and a half share in the property is transferred and paid for by a new co-owner – with either a cash payment and/or taking on responsibility for the mortgage – the consideration for the purposes of SDLT will be £100,000. As this falls below the current SDLT threshold there will be no tax to pay although HM Revenue and Customs will still need to be informed about the transaction by filing an SDLT return.
If the transfer is a gift, and there is no consideration, SDLT doesn’t normally apply. Further, if you transfer an interest in property to your ex spouse or civil partner as part of a court order following a divorce or dissolution of a civil partnership or, alternatively, agree to split the property between you both equally, there is no liability for SDLT – nor any obligation to file an SDLT return. Conversely, unmarried couples seeking a Transfer of Equity may still be liable.
Registering the Transfer of Equity
After the deed has been signed and any SDLT return completed, the post-completion formalities are similar to those carried out on any property purchase, ie; registering the property transaction with Land Registry.
The process of registering a new title (and remortgage) can take anything between 1 to 6 months following completion. This can be even longer for a Transfer of Equity for a leasehold property, particularly if there are any outstanding ground rent or service charge arrears.
Should I seek legal advice for a Transfer of Equity?
It is always best to seek legal advice for any property transaction, not least a Transfer of Equity. Your legal adviser can check your title deeds, draft the Deed of Transfer, obtain consent from your mortgage lender or handle any remortgage.
Further, the legal and financial implications of transferring an interest in property can be significant, for both you and any incoming or outgoing co-owner. In particular, there may be issues relating to the joint ownership of the property on separation, divorce, dissolution of a civil partnership, or even on death.
A legal expert in Transfer of Equity matters will be able to advise you on holding your property as either tenants in common (where you own the property in separate shares) or as joint owners (where the property is owned 100% together). Your legal adviser can also assist with drawing up a written agreement, ie; a declaration of trust, setting out what would happen to the outgoing person’s share should the relationship break down or one of you die.