Transferring of equity is commonly used following a couple's divorce or following a marriage by adding or removing a spouse from the title deed. Transfer of equity is also used when estate planning for tax purposes. It's for these reasons using a solicitor is essential to ensure a seamless process.
Our article will explain how equity is calculated, the transfer of equity process and the financial implications that come with it.
What Is Equity in Property?
Equity is the amount of a property you own. Transferal of equity is the addition or removal of a person from the title deeds of a property.
Calculation of Equity
Equity is calculated by subtracting any remaining mortgage from the property's market value. For example, the average property price is £292,000, if £250,000 remains on the mortgage the equity is £42,000.
Importance of Accurate Equity Valuation
If you are adding or removing a person from the title deed, you should arrange a property valuation to accurately calculate each person's equity. You’ll need to know the market value to determine this. Conducting a valuation is important as the property value may have increased since purchasing.
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Understanding the Transfer of Equity Process
Before deciding whether or not a transfer of equity is the right step for you, it is worth reviewing the following steps involved in the process:
Step 1: Obtain Consent from Mortgage Lenders
If there is any mortgage outstanding, you will need to get the mortgage lender’s consent as they will need assurance that the new ownership arrangement does not affect repayments.
Step 2: Hire a Conveyancing Solicitor
Some mortgage lenders may also insist that a solicitor is involved and will not approve the transaction until this is done. If there is no mortgage, a solicitor is still advised as transfer of equity is a specialist type of property law.
If the transfer involves someone joining the title deed, then both parties can be represented by the same solicitor. If one person is leaving the title deed, through a divorce for example, then the person leaving the deed would require a solicitor, not the remaining party.
Read more on Solicitors for Transfer of Equity
Step 3: Valuation of Property
If you are separating from a partner and transferring equity, a valuation will need to be carried out, so you know how much exactly is owed. The valuation will also help with calculating any Capital Gains Tax (CGT) that the transferor will have to pay as a result.
Another reason for a valuation is to work out the value of the shares being transferred if any money is being exchanged between the parties when someone is joining the title deed. CGT made be payable if the transfer is to anyone other than a spouse or civil partner.
Step 4: Drafting and Signing the Transfer Deed
The transfer deed form will be drafted, normally by the solicitor and is then ready to be signed by all the parties involved including current owner(s) and any prospective owner. It will need to be in the presence of an independent witness - someone who knows the parties well but has no financial incentive with the transaction.
Step 5: Land Registry Registration
The final step in the process is to register the new deed with HM Land Registry, which costs £45 for a property worth the UK average of £292,000. The person receiving the share or becoming the sole owner of the property will need to register with the Land Registry to receive an official copy of the deed.
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Legal and Financial Considerations in Transfer of Equity
There are a few legal and financial implications when it comes to the transfer of equity including:
Impact on Mortgages
If you are planning on transferring equity to a sole owner, the lender will need to be informed. As mortgages are financial agreements, the person relinquishing their share of the deed must let the lender know so they can be released from the agreement. The lender will, as a result, be forced to reassess the new sole owner's affordability.
Tax Implications
Depending on who you transfer to will determine your tax liabilities. One of the most notable taxes is the CGT, which does not apply if you are transferring equity to a spouse or civil partner. However, if you are transferring to children or any other individual then the transaction may be subject to CGT.
This can be worked out by taking the value of the property, subtracting the value of the property at purchase and any ‘profit’ over the current CGT annual exemption of £3,000 is taxed. E.g. Market value is £320,000 minus purchase price £292,000 equals £28,000. If 50% is being shared, £11,000 is taxable due to the exemption.
If you are gifting a share of the property, depending on the relationship you have with that person, it may be eligible for Inheritance Tax (IHT). It will be subject to Potential Exempt Transfer (PET) which is commonly referred to as the 7-year rule. This states that you must survive for up to 7 years for the tax to be reduced culminating in no tax being paid.
Chargeable Consideration
This is associated with Stamp Duty Land Tax (SDLT) and is calculated through any monetary value transferred to the other owner plus any debts associated with the property (i.e. a mortgage). It doesn’t need to be both cash & mortgage, it can be either. Ultimately if the figure is above the current SDLT threshold then payment will need to be made.
Example: John owns a property worth £292,000 with an outstanding mortgage of £200,000. After getting married, he decides to transfer 50% ownership to his wife, Jane. No cash is exchanged, but Jane agrees to take on 50% of the mortgage, which amounts to £100,000. This £100,000 is considered the chargeable consideration. Since it falls below the current SDLT threshold of £125,000 in England, Jane does not have to pay any SDLT.
Costs Associated with Transfer of Equity
Transferring equity involves costs that you should consider including:
Typical Legal and Professional Fees
The average cost of conveyancing for the transfer of equity in the UK is between £239 and £850. This figure is specific to the conveyancer and does not include other costs, such as the land registry.
| Service | Approximate Cost |
|---|---|
Solicitor fees | £239 - £850 |
Anti-money laundering checks | £5 |
Bank transfer fee | £40 |
Land registry fees | £40 |
Freeholder consent | Up to £250 |
Additional Costs
Your mortgage provider may charge you other fees, including ‘change of parties administration fees’. This fee is charged for adding or removing someone from the mortgage agreement and can range from as little as £65 to £205.
If you are remortgaging at the same time as transferring equity, you can expect to pay a fee of approximately £175 plus 1-5% of the property value.
Read more on the Transfer of Equity Costs
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Do I Need a Solicitor for a Transfer of Equity?
Each transfer of equity transaction is different but the legal process nonetheless is complex. When deciding whether to hire a solicitor or not, consider the following:
Independent Legal Advice
It's worth selecting a solicitor as they are unbiased, independent of the situation so can offer clear advice and will act in your best interest. If you are separating from a spouse or civil partner you should both seek separate legal representation to ensure that each party gets the result they want.
Solicitor’s Role
When you choose a solicitor for equity transfers you are getting a range of services that they carry out for you and on your behalf. Some of these can include:
- Review existing title deeds and confirm the identities of individuals
- Liaise with 3rd parties including mortgage lenders
- Seek lender’s approval
- Advise on potential tax implications
- Prepare transfer deed
- They will register the new deed with the land registry
- Ensure any stamp duty land tax (SDLT) is paid
Special Circumstances
Below we discuss some of the scenarios that may result in you transferring equity:
Divorce or Separation Transfers
If you are splitting from your partner you may wish to retain the jointly-owned property but this does come with some considerations. If you have a joint mortgage, you'll need to inform the lender to ensure you can afford the mortgage repayments. You may also be subject to SDLT, unless it is a part of a divorce settlement then it is exempt from this tax.
Inheritance and Gifting to Children
If you are gifting a share of the property to children or leaving the share of the property in a trust until they are over a certain age it is subject to IHT. This can be reduced or eliminated through the PET rule.
Transfer of Equity Without a Mortgage
Transferring equity without a mortgage is more straightforward than transferring with a mortgage. Although the process is more seamless, it is worth getting a solicitor to help avoid any legal or financial implications, such as incorrect filing or tax liabilities.
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How Long Does Transfer of Equity Take?
The average time it takes to complete a transfer of equity can range from 2 to 4 weeks without a mortgage to up to 8 weeks with a mortgage. This timeline depends on a range of factors, including the amount being exchanged, who the equity is being transferred to, and the reason for the transfer, such as separation.
Frequently Asked Questions
Can equity be transferred to someone under 18?
Yes, you can transfer equity to a minor. Though they cannot outright own property, their share in a property can be left in a trust until they turn 18. If there is more than one child that has been transferred equity, the oldest child (over 18) cannot get the legal title until the youngest also turns 18.
What happens if the remaining party cannot keep up with the mortgage?
The mortgage lender will refuse the transfer and need the loan to be repaid in full either by cash transfer or a remortgage with another lender. If the remaining party cannot get a mortgage of their own, then both parties may be forced to sell.
Are there alternatives to a full equity transfer?
Yes, one alternative is to gift the property through a deed of gift, which is a legal way to add someone/persons to the title deed. You can remain in the property but must survive for 7 years for the recipients to not have to pay any IHT.
Find a Conveyancer
The transferring of equity can be a complex property transaction especially when there is a mortgage. Whether you have a mortgage or not, it is highly recommended that you seek an experienced conveyancer to help avoid any financial or legal issues.
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