In simple terms, the equity in a property is the difference between the value of the property and any loans secured on the property. For example, if a house is worth £300,000 and there is an outstanding mortgage of £200,000 secured on it, the equity in the property is £100,000.
A transfer of equity occurs where the legal ownership of a property changes but at least one of the original legal owners remains as a registered proprietor. For example, where a couple transfer ownership from their joint names into the sole name of one of them.
All joint owners hold the legal title as ‘Joint Tenants’ but the equity or ‘beneficial interest’ can be held in one of two ways:
1. As beneficial Joint Tenants. This means that if one owner dies their share in the property will automatically be transferred to the survivor or survivors. In this situation there is no need for a grant of probate. The Land Registry would just need a copy of the death certificate to amend the Title Register.
2. As beneficial Tenants in Common. This means that each owner has a separate and distinct share in the property. If one owner dies, their share would pass in accordance with their will or the intestacy rules and a grant of probate would be needed to effect the change
If the legal owners of the property are not changing and you simply need to make changes to the shares held by each owner, you would not need a Transfer of Equity. This would be dealt with by a Declaration of Trust, a document which sets out the respective shares of all owners.
There are a number of situations where you may a require a Transfer of Equity, eg:
• When two co-owners separate or divorce and one buys the other’s share of the property or the court orders the transfer of the property into the name of one party as part of the divorce settlement.
• For the purpose of estate planning you may wish to divide up assets to obtain the best tax advantages.
• To add a new spouse or partner as a co-owner of the property.
This will depend on the circumstances. There may be limited circumstances where there is no risk of any conflict of interest where one solicitor could act for both parties. This would apply most commonly where property is being transferred into joint names and is free of mortgage.
In many instances, particularly where a property is being transferred subject to a mortgage, solicitors would advise that both parties are separately represented as there can be a conflict where, for example, indemnities are required.
There may be instances where the solicitor is unable to act for both parties but the other party does not wish to take legal advice. This may be possible provided that the other party obtains a Form ID1 to comply with Land Registry requirements.
If the property is subject to an outstanding mortgage, the lender’s consent will be needed before a transfer of equity is made. The owners of the property may wish to transfer the equity subject to the existing mortgage, or redeem the existing mortgage and take out a new mortgage. The owners of the property should take financial advice on the best approach for their specific circumstances.
If the property is being transferred subject to a charge, additional provisions will be needed in the transfer depending on the situation for example:
1. If A is transferring the property into the joint names of A and B, the lender would require a clause to be added requiring B to agree to comply with and be bound by the terms of the mortgage. It is important that B takes advice on the terms of the mortgage to ensure that the liabilities being taken on are understood.
2. If A and B are transferring the property into the sole name of A, B would likely want a clause adding to release B from all liability under the mortgage. There may be situations where a lender is not willing to release B from liability. In that situation it is important that a provision is added to allow A to indemnify B against any future breach of the mortgage obligations.
Even though you may have already purchased the property and paid Stamp Duty at that time, further stamp duty could be payable if the legal ownership is changed. This may seem unfair but unfortunately is generally the case although there are some exemptions – see below.
Where A pays B money for B’s share of the property, the amount should be taken into account to calculate the stamp duty land tax (SDLT) liability. In addition, the assumption of liability for an existing debt is chargeable consideration for SDLT purposes.
For example, A and B own a house that is valued at £400,000. They have equity in the property of £300,000 and an outstanding mortgage of £100,000. A is going to have sole ownership of the property. A pays cash for half of the equity (£150,000) and becomes responsible for B’s half of the outstanding mortgage (£50,000). The consideration for SDLT purposes is therefore £200,000. As this is above the SDLT threshold, A must pay SDLT on this amount.
Furthermore, the stamp duty 3% surcharge payable for second properties can also apply. If A and B jointly own the property they live in and A owns a second Buy to Let property and decides to transfer this into the joint names of A and B, the additional 3% surcharge would be payable. This could apply even if there is no cash changing hands. For example if there is a mortgage of £100,000 outstanding on the property, the consideration for Stamp Duty Land Tax purposes would be £50,000. Whilst this is below the SDLT threshold, the 3% surcharge applies to any transfer over £40,000 and therefore would be payable.
Certain transactions made in connection with the ending of a marriage or a civil partnership are exempt from SDLT. These transactions are those made between the parties to the marriage or civil partnership as a result of:
1. Certain types of court order.
2. An agreement between the spouses in contemplation of, or in connection with, the dissolution or annulment of their marriage or civil partnership.
3. Their judicial separation or a separation order.
It should be noted that the exception does not apply if the acquisition involves any other individuals as buyers or sellers for example where a divorcing couple transfer property to one of the spouses and their new partner.
From 22 November 2017, the 3% second property surcharge no longer applies to transfers of property between spouses or civil partners providing that they are living together on the effective date of the transaction. Again, this does not apply if any third parties are involved.
Using a transfer of equity to protect a property from creditors is unlikely to succeed because a Trustee in Bankruptcy can challenge transactions made by the bankrupt.
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 If a bankrupt makes a disposal of property in the five years prior to the commencement of bankruptcy, they have committed an offence.
Any disposal of property by a bankrupt between the presentation of the bankruptcy petition and the making of the bankruptcy order is void unless it has been ratified by the court either at the time.
If the property is subject to a mortgage the lender may want reassurance that the transaction will not be challenged in these ways. If so, the Transferors may be asked to swear a declaration of solvency or a suitable declaration may be added to the Transfer document. The lender may also require an indemnity insurance policy to be taken out by the new owner to protect the lender from any such claim.
Please also note that this can affect a future sale of the property. The price paid for a property is noted in the Proprietorship Register of the Title and, if it is apparent on the sale of the property that the price paid was less than the full value of the property or that no consideration was paid, the buyer may require an insolvency indemnity policy to be provided.
This has been a brief note of the considerations that arise in relation to relatively straight- forward transactions. For more complicated situations and those involving properties owned by Companies or held upon Trust, further specialist advice would be recommended from financial advisors and tax experts.
If you need help with any of the matters discussed ie Transfers of Equity, Declarations of Trust or probate, please contact Jayne Gill in our residential conveyancing department at firstname.lastname@example.org or Terry Sharpe in our private client department at email@example.com
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