I am thinking of transferring half of my share in the property to my partner. What sort of things do I need to consider before I do this?
Transfer of Equity
Simon Pook, Head of Residential Property, replies:
A transfer of equity occurs where the legal ownership of a property changes but at least one of the original owners remains as a registered proprietor. In essence, the equity in the property is the difference between the value of the property and any mortgage secured against it. Therefore if a property is worth £500,000, and there is an outstanding mortgage of £200,000, the equity in the property is £300,000.
If the property is subject to an outstanding mortgage, then the lender’s consent will need to be obtained before a transfer of equity can take place. This is something that the individual who wishes to transfer the share should attend to before solicitors are contacted. The lender will send out their standard form which you will need to complete and the lender will then decide whether to consent to the proposed transfer.
You may decide that the best way forward would be to redeem the existing mortgage and take out a new mortgage instead and you should obtain financial advice on the best approach for your specific circumstances. There may also be stamp duty implications if the property is transferred subject to a mortgage.
If the transfer of equity will add a new co-owner to the title, the parties should consider whether they wish a Declaration of Trust to be put in place which will state the proportions in which they hold the property. If this is the case, the property should be held as tenants in common rather than as joint tenants and a Declaration of Trust will:
- Confirm the extent of their respective interests.
- Set out any express terms that they wish to include (e.g., who will be responsible for the mortgage, cost of repairs and maintenance on the property, buildings insurance, etc.)
Using a Transfer of Equity in order to protect a property from creditors is unlikely to succeed because a Trustee in Bankruptcy can challenge transactions made by the bankrupt. If no monies are being paid for the share in the property which is being transferred, this is considered to be a “transfer at undervalue” and a Trustee in Bankruptcy has the right to challenge any disposition of assets by the bankrupt if a transfer at undervalue took place in the five years prior to the making of the bankruptcy order.
Any Lender will want reassurance that the transaction will not be challenged in this way and therefore you may be asked to enter into a Declaration of Solvency.
There could also be tax implications. Tenants in common are generally treated separately for tax purposes so each individual will pay their own tax. For Income Tax and Capital Gains Tax (CGT) purposes and any profits and losses arising from the property will be treated as accruing directly to the relevant co-owners according to their beneficial shares in the property. I would therefore suggest that expert tax advice is obtained before deciding to proceed with a transfer of equity.
There can also be Inheritance Tax implications and again advice should be sought in this regard.
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