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. 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 this article is about.

What is transfer of equity?

The term transfer of equity refers to the formal process of transferring a share of ownership in a property 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 share is removed 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, they will usually reassess the affordability of the person who is to receive the share. The lender will usually carry out a credit check and affordability assessment on everyone who will be named on 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 can mean adding a new owner, removing an existing owner or changing the size of each owner’s share; it is different from selling the whole property to a new buyer.

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 can be a suitable option.

• 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 a share as a gift to a family member – transfer of equity can be used to gift part of your share to someone close to you. Here, the situation largely depends on whether the property is covered by a mortgage. If so, your lender’s consent and a credit and affordability assessment of the recipient will usually be required. If the recipient also joins the mortgage, joint borrowers can agree between themselves how to split the monthly payments, but each of them is legally responsible for the whole mortgage, so if payments are missed the lender can ask either of them to pay the full amount.

• 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 a share in a property covered by a mortgage, you will usually need your lender’s consent first. 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 lender has its own procedure and internal forms, but a mortgage adviser or the lender can usually help you with this.

The form will usually ask you to indicate:

• the new owner, or the existing owner who is to be removed;

• the relationship between the parties and the reason for the transfer (e.g. a new partner, divorce);

• financial details of the person taking on a share, so the lender can assess affordability.

Remember that if any problems arise when discussing the terms of the transfer with the lender – 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 lender on your behalf or suggest another solution to the problem.

Once the lender has given its preliminary consent to the transfer of equity, a conveyancer should be hired, as lenders usually require a solicitor or conveyancer to act when the property is mortgaged. They will prepare the necessary documents (e.g. the TR1 transfer deed and the AP1 application to HM Land Registry; form ID1 is used to verify the identity of anyone not represented by a conveyancer) and can help coordinate the entire process and submit the application. These are HM Land Registry forms used in England and Wales. At this stage, however, there is some uncertainty – it may turn out that the person who is to take over the share does not meet the lender’s affordability requirements. Because the lender may still decline the application, ask your conveyancer how their fees are charged if the transfer does not go ahead.

Transfer of equity and Stamp Duty Land Tax

A transfer of equity may be subject to Stamp Duty Land Tax. Whether it is due depends on the ‘chargeable consideration’ – any money paid for the share plus the share of the outstanding mortgage that the recipient takes on. No SDLT is payable on a gift of a share in a property that has no outstanding mortgage, as long as no money is paid for it. Where the recipient takes on part of the mortgage, at the standard residential rates SDLT is due only if the chargeable consideration exceeds the threshold (currently £125,000 for residential property). Higher rates can apply, for example if the person taking on the share already owns another residential property (see the GOV.UK guidance on buying an additional residential property) or is not resident in the UK.

Transfers made under an agreement or court order on divorce, dissolution of a civil partnership, annulment or legal separation are exempt from SDLT. You can find more detail in the GOV.UK guidance on transferring ownership of land or property. SDLT applies in England and Northern Ireland; in Scotland Land and Buildings Transaction Tax (LBTT) applies and in Wales Land Transaction Tax (LTT), each with its own rules.

How to use transfer of equity to reduce inheritance tax?

Giving away a share of your home through a transfer of equity may reduce the value of your estate for Inheritance Tax, usually only if you survive 7 years and do not keep benefiting from the gifted share. There is normally no Inheritance Tax to pay if the value of the estate is below the £325,000 threshold, and the standard Inheritance Tax rate is 40% on the part of the estate above the threshold. Gifts between spouses or civil partners are generally exempt, and a residence nil-rate band may raise the threshold when a home is passed to children or grandchildren.

For example, 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 may reduce the Inheritance Tax due, depending on the 7-year rule, the residence nil-rate band and how the property is used after the gift.

However, remember that a lot depends on the situation here. HMRC may determine that the gifted share 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 gifted share is still treated as part of your estate for Inheritance Tax. HMRC accepts that a gift of a share is not a gift with reservation where you and the recipient both live in the property and share the running costs (see HMRC’s Inheritance Tax Manual). Don’t forget about the 7-year rule: a gift usually falls outside the estate only if the giver lives for 7 years after making it. You can read about this rule and many others concerning inheritance on the blog citywidewills.co.uk. The subject of inheritance planning is very complex, so it is always worth consulting a professional.