Transferring equity in a property can be very beneficial for tax purposes as well as for individual circumstances however, there are many things to consider before making the decision to go through with the transfer. The purpose of this blog is to provide some general information as well as to highlight the considerations for any person who is considering transferring equity.

What does Transfer of Equity mean?

The term ‘Transfer of Equity’ is used when an individual(s) wishes to either add or remove a person(s) to or from the title of the property, therefore amending the ownership of the property.  It is commonly done between parents and their children or between spouses. The person transferring the property is known as the ‘transferor’ and will be referred to as such throughout this blog.

The transfer should be made to a person(s) who is over the age of 18 years old and are capable and willing to be an owner of the property, however in certain circumstances, someone who is younger than 18 years can receive the property albeit without legally holding it, the way this is achieved is through the use of a Trust Deed which appoints a Trustee who legally holds the property until the person reaches the age of 18.

When a person(s) transfers equity in a property, there is not necessarily any transfer of money involved. When a parent transfers the ownership of their property to their child without any monetary consideration, it is usually known as a ‘gift’.

The legal term ‘equity’ refers to the amount of property that is owned. For example, if the property has a mortgage, then the ‘equity’ available from the property would be the total value of the property, less the outstanding mortgage amount, the remaining balance is the available equity.

Tax Considerations

Whether there is valuable consideration or not, there may be tax payable, such as stamp duty land tax, capital gains tax, and inheritance tax on the death of the transferor.

In relation to stamp duty land tax (SDLT), for any transfer which has a monetary value involved that is above £125,000 there will be SDLT payable. The amount of tax payable depends on the total value transferred. If, however, the transfer of equity is due to a divorce and a result of a private agreement or Court Order, SDLT does not apply. If the property is transferred as a gift or under the terms of a Will, there is no SDLT payable either.

In relation to capital gains tax (CGT), there is currently a spouse exemption. Therefore, should a property be transferred between spouses there will not be any CGT to pay. For a transfer of equity to anyone else, including children, the property may be subject to CGT. It is important to note that HMRC deems the property value to be the market value, even if the transferor receives no money or receives money for less than the market value.

The CGT that may be payable is the transferor’s responsibility. The amount due will depend on the amount of gain or loss incurred, as a result of the transfer. The total gain or loss amount is calculated by reviewing the difference between the capital proceeds of the transfer and the initial purchase price. Once this difference is calculated, should there be a gain above £12,300 for individuals or £6,150 for Trustees, the amount of tax payable will depend on the transferor’s income as the gain is added to the income tax for the applicable year. For the 2020/2021 tax year, CGT on a residential property is 18% for a standard rate taxpayer and 28% for a higher rate taxpayer.

If the property being transferred is the main home of the transferor, the transfer may be exempt from capital gains tax when transferring to someone else.

When considering inheritance tax (IHT), the potential liability for this tax comes from a gift being made, most commonly between parents and children, and there is normally no monetary exchange. Should the transferor go ahead with the gift and survive for at least seven years after gifting the property, the asset will be removed from their estate and no IHT will be payable on their death.

In order for the gift to be effective, there must be no ties between the transferor and the property after the gift is made. If the transferor remains living in the property for example without paying any rent, the gift will be considered a ‘gift with reservation of benefit’ and will remain in the transferor’s estate and therefore IHT may be payable.

To avoid the gift being deemed as having a reservation of benefit, the transferor could rent the property from their children at the usual market rental rate. Of course, the person who has received the property will need to consider how much income tax will be payable on the rental income that they receive.

The information contained within this section is general tax information and should not be relied upon by parties. Each person’s circumstances are different and independent tax advice should be sought by the parties involved.

Other Considerations

Some people may be considering transferring their property to their family members to avoid paying care home fees. By doing this however, the transfer may be deemed by the local authority as ‘deprivation of assets’. Deprivation of assets applies when a person intentionally reduces their assets so that they will not be included when the Local Authority calculates how much contribution is needed by the transferor to pay towards the care they receive.

Should the Local Authority believe that someone has deliberately deprived themselves to avoid paying care home fees, they are able to still include the value of the property transferred in their calculations, despite the transferor no longer legally owning it.

To mitigate against the Local Authority making this decision, timing is extremely important. The Local Authority will review how long ago the property was transferred and if at the time of the transfer, the transferor was fit and healthy and could not have imagined needing care and support at the time. If the timing of the transfer is sufficiently long ago and the transferor was seen to be fit and healthy at that time, then the transfer may not count as deprivation of assets.

Another consideration that the transferor should have is the risk of divorce. Although we do not like to consider divorce as a possibility, it does unfortunately happen and therefore the transferor must be aware of this fact. Divorce can occur either between them and their partner if the property is being transferred into joint names, or alternatively, if the property is being transferred to their child, their child may get married in the future or already be married and there is of course the risk of divorce.

If the new legal owner of the property starts divorce proceedings, the property transferred to them is likely to be considered a matrimonial asset and therefore, will be subject to the divorce proceedings. If the property is deemed to be a matrimonial asset it could be at risk of being sold and the proceeds of sale split or could even be transferred in its entirety to one of the parties in the divorce, and that may not be wanted by the transferor.

If the transferor transfers the property entirely to their child, their legal interest in the property ceases and should a divorce later occur with their child and the child’s spouse, there is unfortunately nothing that the transferor can do to protect the property from being part of the divorce proceedings.

Another similar issue is in relation to bankruptcy. Should the individual who receives the property later become bankrupt, the property will be part of the bankruptcy recovery and therefore the property could be at risk of being auctioned to recover funds for the creditors. Again, there is very little that the transferor can do once the property is transferred.

It is therefore very important for the transferor to consider whether any of these risks are present in their circumstances or could be present in the future and if they are, is it still something that they would like to do.

The Procedure

The process of transferring equity is normally much more straight forward than a standard sale or purchase transaction.

The main form in the process is the Land Registry TR1 form. This form details who the transferor is and who the new owners are going to be. Along with the TR1 form, the parties involved should have copies to the Title deeds and have a full understanding of the property and any issues with it before going ahead with the transfer.

If there is no mortgage involved, the process is even more straightforward. All parties involved will need to sign the TR1 form and file it with the Land Registry. The Land Registry will then update the title register for the property with the information supplied in the form.

If there is a mortgage involved however, this may be a little more complicated. Consent will need to be obtained first from the Lender and the Lender may require checks on the individuals that the property is being transferred to, or additional information to be provided to them. In some cases, the Lender may refuse to give consent if they have concerns.

Using a solicitor in this process is extremely useful as they will be able to effectively facilitate the transfer with little stress to the parties involved. We can deal with the Lender on the parties’ behalf as well as ensure the TR1 form is correctly completed and submitted to the Land Registry and if applicable, calculate any tax due.

Speak to the experts at Cleversons to discuss how a transfer of equity could be beneficial for you and your loved ones. Call today on 0800 368 5102 or complete the online enquiry form below.

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