Transfers of Equity – A Brief Summary
In a transfer of equity of a property the owner adds or removes a person to or from the title thereby altering the ‘ownership’ of the property. The important point to remember is that the equity in the property is different from the value of a property. The equity of a property is the value of the property less the outstanding value of the mortgage. So, if your home values at £300,000 and the value of the remaining mortgage is £100,000, the equity in your property would be £200,000.
Although in a transfer of equity the legal ownership of a property is transferred, such a transfer is different from buying and selling a property (in which also the legal ownership is transferred). In a typical transfer of equity there is usually no money changing hands between the parties involved. For example, this happens when a property is solely owned by a married person, who then transfers part of the property to the other as a gift.
In the common legal jargon the transfer of a property to either a husband or a wife as a result of divorce settlement (in which money is being transferred) is sometimes also referred to as transfer of equity. So a person may transfer the equity of the property to their spouse as a result of the divorce settlement provided the spouse accepts to pay the mortgage on the property.
One important point to remember is that in the transfer of equity cases where no money is being transferred between the parties, one solicitor can act for both parties; such cases are usually involved transactions between parties who are related by blood, adoption, marriage or living together. The other aspect of such transactions is that there will be no stamp duty land tax liability.
There is, however, an exception to this rule.
If there is a mortgage on the property, there may be some tax implications for the parties. For example, if A and B own a house that is valued at £500,000 with an outstanding mortgage of £200,000 and if A transfers his share of the property to B as a gift, then B will be deemed to have paid half of the outstanding mortgage, namely £100,000, which is currently calculated at 0% (subject to B not owning another property on completion of the transfer). For SDLT purposes B’s liability is therefore calculated based on their obligation to be liable for half of the mortgage.
If the property is subject to an outstanding mortgage, the lender’s consent will be required before a transfer of equity is made. It is the usual practice for the lender to give its consent where the new owner is in a good financial standing and can undertake to pay the mortgage payments. Sometimes, however, the lender may require the redemption of the mortgage before the transfer of the property.
If a transfer of equity is effectively a gift or a transaction at undervalue, the law allows for transactions to be set aside in cases of bankruptcy or insolvency of the person who has transferred the property. A trustee in bankruptcy has the power to challenge any disposition of assets by the bankrupt at an undervalue that took place in the five years prior to the making of the bankruptcy order. However, a third party purchaser of such property in that time is protected provided that the purchase was for value, the third party acted in good faith and had no knowledge of the bankruptcy petition.
If you have any questions regarding transfer of equity, please contact Alireza Nurbakhsh at alireza@meaby.co.uk or on 020 7703 5034.
