What is a Transfer of Equity?

A transfer of equity is essentially a legal process where the ownership of a property is adjusted among its current owners or transferred to new ones.

This might happen for several reasons, such as during a divorce when one person wants to buy the other out, when someone remarries and wishes to add their new partner to the property ownership, or when trying to make tax arrangements more efficient.

Whether you’re transferring all or part of the equity, or deciding how much ownership goes to whom, this process can become quite complex depending on your situation.

That’s why it’s strongly recommended to seek the help of a solicitor who specialises in transfers of equity to ensure everything goes smoothly.

Understanding Equity in Property

Equity in property refers to the portion of the property that you truly own. For example, if you own a house worth £300,000 and have a £150,000 mortgage, the equity in the property is £150,000.

This is the amount of the property that you own outright, without any debt. Over time, as you pay off more of your mortgage, your equity in the property increases.

However, it’s important to remember that the value of your equity can also change based on the overall value of the property itself, which can go up or down.

Related: What is the difference between leasehold and freehold?

Common Reasons for Transferring Equity

There are a few common situations where a transfer of equity might be needed:

Divorce or Separation:

When a couple splits up, one person might want to remove the other’s name from the property title and buy out their share of the equity.

Remarriage:

If you remarry, you might want to add your new spouse to the property ownership, giving them a share of the equity.

Tax Efficiency:

Sometimes, people transfer equity as a way to manage or reduce their tax liabilities.

Gifting Equity:

You might also consider transferring equity to your children or other family members, either as a gift or to plan for the future.

Each of these scenarios can bring different legal and financial considerations, so it’s important to have a clear understanding of your reasons before proceeding.

Costs Involved in Transferring Equity

Transferring equity isn’t just a matter of signing a few papers—it comes with costs that vary depending on the complexity of your situation. Some of the main costs to consider include:

Legal Fees:

You’ll need to pay a conveyancer or solicitor to handle the legal aspects of the transfer.

Mortgage Lender Fees:

If there’s a mortgage on the property, your lender might charge a fee to make changes to the mortgage agreement.

Stamp Duty Land Tax (SDLT):

Depending on the value of the property and the details of the transfer, you may need to pay stamp duty.

Land Registry Fees:

There’s a fee for registering the transfer with the Land Registry, which officially records the change in ownership.

Additional Charges:

Your conveyancer might also charge for any additional searches or registration tasks that need to be completed.

It’s important to be aware of these potential costs upfront so that you can budget accordingly.

Stamp Duty Implications

Stamp duty can be a bit tricky when it comes to transferring equity, and whether or not you need to pay it depends on your specific situation:

No Stamp Duty in Some Cases:

If you’re transferring equity because of a divorce, legal separation, or the end of a civil partnership, and one person is leaving the property title, you won’t have to pay stamp duty.

Similarly, if you’re gifting a share of your property to a family member or receiving a property through a Will, there’s no stamp duty to pay.

When Stamp Duty Applies:

If you’re adding a new person to the property ownership and giving them a share of the equity, stamp duty may be required.

The amount you’ll need to pay depends on the value of the property and any mortgage involved. Generally, stamp duty is only payable on transfers where the equity is worth more than £250,000.

Special Rules for Buy-to-Let or Second Properties:

If the property in question is a buy-to-let or a second property, there’s an additional 3% charge on top of the regular stamp duty rates, provided the chargeable amount is more than £40,000.

Understanding these implications is crucial, as stamp duty can significantly impact the overall cost of your equity transfer.

The Process of Transferring Equity

Transferring equity involves a series of steps to ensure that the change in property ownership is legally recognised. Here’s a simple breakdown of what you can expect:

Obtain Title Deeds:

Your conveyancer will start by obtaining an official copy of your property’s title deeds from the Land Registry. This document is essential as it shows the current legal ownership of the property.

Drafting the Transfer Deed:

The next step involves your solicitor drafting a Transfer Deed document. This is a legal document that outlines the details of the transfer, such as who is transferring their share of the equity and who is receiving it.

You’ll have the chance to review this document before moving forward.

Notifying Third Parties:

If you have a mortgage on the property, your mortgage lender needs to be informed about the transfer. They will need to provide written consent, as the transfer could affect the terms of your mortgage.

The lender will likely perform their checks to ensure that the mortgage payments can still be met.

Signing the Transfer Deed:

Once everything is in order, you’ll meet with your solicitor to sign the Transfer Deed. This must be done in the presence of an independent witness, who will also sign the document to confirm that they witnessed your signature.

Registering the Deed:

Finally, the signed Transfer Deed is submitted to the Land Registry to officially register the change in ownership. This step is crucial as it updates the public records to reflect the new ownership structure.

Transferring Equity with an Existing Mortgage

Having an existing mortgage doesn’t prevent you from transferring equity, but it does add a few more steps to the process. Here’s what you need to know:

Lender’s Approval:

If you’re removing someone from the title and buying out their share, the mortgage lender will need to be satisfied that the remaining owner(s) can still afford the mortgage payments on their own.

Similarly, if you’re adding someone to the title, the lender will want to ensure that the new owner can contribute to the mortgage payments.

Re-mortgaging Options:

In some cases, the existing mortgage might need to be renegotiated or replaced with a new mortgage, especially if the lender isn’t comfortable with the new ownership arrangement.

This process is known as re-mortgaging and might involve additional costs and checks.

Impact on Loan Terms:

It’s important to discuss your options with both your lender and your solicitor to understand how the transfer might affect your current mortgage terms and to ensure that the new arrangement is feasible.

Transferring Equity to Children

You can transfer equity to your children, but the process varies slightly depending on their age:

Transferring to Minors:

If your child is under 18, the equity will need to be placed into a trust. This means that while the property is effectively in the child’s name, it is managed by trustees (often the parents) until the child reaches adulthood.

Transferring to Adults:

If your child is over 18, the transfer process is similar to transferring equity to any other adult. The child will own the property outright and can make decisions about it, including dealing with any mortgage responsibilities.

Tax Efficiency:

Some parents choose to transfer equity to their children for tax planning purposes. However, it’s important to consider the implications, such as inheritance tax and the potential impact on future financial decisions.

Risks and Responsibilities:

When your child becomes the legal owner, they have full control over the property.

This means that if they run into financial difficulties, it could affect the property. For instance, if they fail to keep up with mortgage payments or are declared bankrupt, the property could be at risk.

Timeline for an Equity Transfer

The timeline for completing a transfer of equity can vary, but generally, you can expect the process to take between 4 to 8 weeks. Here’s what affects the timeline:

Complexity of the Case:

Simple transfers with no mortgage involved tend to be quicker, while more complex cases, such as those involving re-mortgaging or third-party consent, can take longer.

Third-Party Involvement:

The process can be delayed if you need approval from a mortgage lender or if the Land Registry is particularly busy.

Efficiency of Your Conveyancer:

A good conveyancer can help speed up the process by ensuring that all documents are prepared quickly and by chasing up any third parties involved.

Pros and Cons of Transferring Equity

Before you proceed with a transfer of equity, it’s important to weigh the pros and cons based on your personal circumstances:

Pros

Tax Efficiency:

Transferring equity to children or other family members can be a strategic move for reducing inheritance tax and other tax liabilities.

Simplified Ownership:

If you’re buying out a former partner or simplifying ownership, a transfer of equity can make it clear who owns what portion of the property.

Flexibility:

It allows you to adjust property ownership to reflect changes in your personal life, such as marriage, separation, or financial planning.

Cons

Financial Risks:

Transferring equity to someone else, particularly a child, means you might lose control over the property. If they encounter financial difficulties, the property could be at risk.

Costs:

There are various costs involved, including legal fees, potential stamp duty, and mortgage-related charges, which can add up.

Emotional Implications:

Particularly in cases of divorce or separation, transferring equity can be an emotional process, and it’s important to approach it with a clear understanding of the consequences.

Conclusion

Transferring equity is a significant legal process that can have important financial and personal implications.

Whether you’re looking to simplify property ownership after a change in your personal circumstances or plan for the future, it’s crucial to understand each step of the process and the potential costs involved.

Working with an experienced solicitor can make the process much smoother and ensure that all legal requirements are met. If you’re considering a transfer of equity, don’t hesitate to seek professional advice to guide you through the process and help you make informed decisions.