Transfer of Equity in the UK – everything you need to know

When repaying a mortgage in the UK, various situations may arise in your life. Lenders are aware of this and allow for various modifications to the terms and conditions or joint solutions to more difficult situations, such as delays in repaying instalments. Sometimes, a new person may appear in your immediate environment or, conversely, someone may disappear from it. If you have or are planning to take out a joint mortgage, it is possible to add or remove a person from the title deeds – and that is what today’s post will be about.

What is transfer of equity?

The term transfer of equity refers to the formal process of transferring part of the shares from one person to another. As mentioned in the introduction, this may apply both to situations where part of the ownership is transferred to another person (e.g. a mortgage is converted into a joint mortgage) and to situations where the co-borrower’s shares are deleted and transferred to you in full. Of course, this is not a simple process – if the property is mortgaged, in order for the lender to agree to the transfer of shares, they must reassess thecreditworthiness of the person who is to receive them. The bank can only issue a new mortgage agreement after ensuring that each of the persons holding shares will be able to repay the mortgage.

However, a transfer of equity does not necessarily have to involve a mortgaged property – it is any process of partial change in the ownership structure of a property. It should therefore be remembered that a transfer of equity cannot result in the original owner having no share in the property – in such a case, it would be a full sale, which is carried out on different terms.

In what situations is transfer of equity applicable?

Adding or removing someone from property ownership documents does not happen often, but there are several situations that can be considered the most common reasons for such decisions. They usually concern changes in the property owner’s life situation:

• Divorce or separation – in such situations, there are several solutions, and transfer of equity is one of them. During this undoubtedly unpleasant situation, many conflicts may arise, especially when such a huge financial commitment as a mortgage is involved. If both parties agree that the transfer of both the entire ownership of the property and the liability to one person, who has the appropriate creditworthiness, is acceptable, a transfer of equity is an excellent solution.

• New partner - in contrast to the above example, a transfer of equity can work when entering into a relationship with a new person. If one party is paying off a mortgage and the other is able to support them by taking on part of the liability, the couple can use a transfer of equity to share the mortgage;

• Transferring shares as a gift to a family member – transfer of equity can be used to gift part of your shares to someone close to you. Here, the situation largely depends on whether the property is covered by a mortgage. If so, the bank’s consent and a credit assessment of the recipient will be required. Remember that transferring part of the shares in a property that you are still paying off to a loved one does not mean that they will have to pay the instalments. When the mortgage is joint, both co-borrowers are responsible for it, but the bank does not require a strict definition of how they will share the payments, which allows them to determine this issue between themselves. As a result, the person who receives part of the shares will be responsible for the mortgage, but will not have to pay the instalments.

• Changes in the ownership structure of the investment – when the situation between investors who have jointly taken out a mortgage for a property changes, they can make a transfer.

How to apply for a transfer of equity on a mortgage?

If you want to transfer shares in a property covered by a mortgage,** you will first need to obtain the bank’s consent**. Although this is not a rule, consent may be subject to a fee or additional conditions. Once you have all the relevant information, the next step is to submit an application. Each bank has its own procedure and internal forms, but a mortgage advisor or bank employee will almost always help you with this.

The form will almost always require you to indicate:

• Nowego właściciela lub dotychczasowego, który ma zostać wykreślony;

• Relacje zachodzące między stronami, czyli powód potencjalnego transferu (np. nowy partner, rozwód);

• Dane finansowe osoby, która ma przejąć udziały - To będzie potrzebne do oceny zdolności kredytowej.

Remember that if any problems arise when discussing the terms of the transfer with the bank – for example, if the terms are not suitable for you or the lender is unwilling to give preliminary consent to the transfer of equity – it is a good idea to contact a reputable mortgage broker. Drawing on their experience, they will be able to talk to the bank on your behalf or suggest another solution to the problem.

Once the bank has given its preliminary consent to the transfer of equity, a conveyancer should be hired, as this is usually required throughout the entire process. They will prepare the necessary documents (e.g. TR1, ID1 forms) and can help coordinate the entire process and submit the application. At this stage, however, there is some uncertainty - it may turn out that the creditworthiness of the person who is to take over the shares is too low. To avoid unnecessary costs associated with the lawyer’s work, it is recommended to divide the contract with the conveyancer into initial actions paid for immediately and a full service, which will be performed and settled only after the final approval of the application by the bank.

Transfer of equity and Stamp Duty Land Tax

Few people remember that a transfer of equity may be subject to Stamp Duty Land Tax. However, whether such an obligation arises depends on the situation. First of all, SDLT does not have to be paid when the transfer is made on a property without a mortgage, e.g. if it is a gift. However, if the shares being transferred are subject to a mortgage, the person receiving them must pay SDLT.

In practice, however, the tax liability arises extremely rarely. As the Stamp Duty exemption amount in this case is as high as £250,000 and is calculated on the value of the transferred shares, not all shares, the vast majority of people will not have to pay SDLT. It is also worth noting that if the transfer of equity takes place between spouses or civil partners, even if the property is mortgaged, no Stamp Duty is payable.

How to use transfer of equity to reduce inheritance tax?

An interesting point to note is that you can reduce the value of your estate through a transfer of equity. This can be used to lower the amount of Inheritance Tax you owe, or even to completely exempt you from paying it. It is important to remember that in the case of inheritance tax, you will not pay a single pound if the value of the estate does not exceed £325,000. However, any amount above this threshold is subject to a 40% tax!

Therefore, if you estimate your assets to be worth around £600,000, including a property worth £350,000, you can use a transfer of equity to transfer part of it to your heirs while you are still alive. In some cases, this will allow you to achieve significant financial benefits.

However, remember that a lot depends on the situation here. HMRC may determine that the property is a so-called Gift with reservation of benefit, i.e. part of the estate that the owner theoretically gives away but still benefits from. In this case, the transfer of the house or flat is still subject to taxation. To avoid this, the person who takes over the shares may move in - then the rules of co-ownership will apply in full and their share will not be subject to taxation. Don’t forget about the 7-year rule - you can read about this rule and many others concerning inheritance in our article entitled ‘Trust - everything you need to know’ and on the blog citywidewills.co.uk. The subject of inheritance planning is very complex, so it is always worth consulting a professional.