In the UK, many people are now gifting a part of their property to a loved one. Not only is it a wholesome gesture that is meant to touch the hearts, but it can prove to be a good financial management decision. How so? Transfer of equity has the potential to help you out by managing inheritance or reducing tax burdens.
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If you are looking to transfer equity to a family member but there’s a mortgage involved, things can get a bit tricky. Lucky for you, we have come prepared to break down everything you need to know about the transfer of equity mortgage.
What is Transfer of Equity, and how does it apply to transfer to family member?
Equity refers to the share you own of a property. A transfer of equity is when you bring changes to the ownership of a property by either adding or removing someone. It’s essential to understand that while the equity (ownership share) in a property changes hands, the mortgage tied to the property often remains.
In such an arrangement, the parties involved modify the percentage of ownership between them. It has to adhere to certain rules and regulations of the UK. And while it may sound simple, there are several legal and financial factors that play a role here, especially if a mortgage is in the scene.
The Mortgage Factor in Transfer of Equity
An existing mortgage makes transfer of equity a bit different as you may need lender’s approval before making any changes to the arrangement. This is crucial for most lenders in the UK to make sure that all involved stakeholders are capable of making the loan repayments.
When you seek a transfer mortgage, lenders will assess the situation similar to a typical mortgage but this time to include the remaining party or new parties’ financial situation.
If you are removing a certain member who helped qualify for the mortgage in the first place, you need to assure your lender that the remaining members can still take on the responsibility. Bringing such changes to a mortgage deal can make the lenders charge you an administrative fee.
When Do You Need to Transfer Equity?
If you are getting married, and want to add your other half to the property title, you have to apply for a transfer equity mortgage. On the other hand, when a couple separates, one of them may wish to remove themselves or the other from the mortgage.
Transfer to family members especially comes into play when a property is gifted. For example, parents may want to transfer part of their ownership to their children for tax or inheritance planning.
Lastly, if there’s a death involved, the share of the deceased stakeholder can be transferred to a surviving relative. Since there are multiple scenarios possible, the implications and considerations are several as well and should be navigated with expert advice.
Can I Transfer Equity to a Family Member?
Yes, you can! In fact, it’s getting more and more common for relatives to do an equity transfer in the UK, as a gift to their loved one. Especially as part of inheritance or tax planning.
However, transferring a mortgage comes with its set of financial implications. In England and North Ireland, there’s something called Stamp Duty Land Tax (SDLT). This is something you have to pay if you are taking on responsibility for an outstanding mortgage and it exceeds a certain threshold.
There’s also capital gains tax which is applied if the transferred property is not your primary residence. Lastly, if the person who gifted you the equity passes away within seven years, you may be subjected to Inheritance tax (IHT).
As there are several tax implications involved, consulting with tax advisors or solicitors for transfer of equity mortgage is highly recommended to fully understand what you are getting into, legally and financially.
How to Transfer Mortgage
Here are some basic steps for transferring a mortgage as part of a transfer of equity.
- Speak to a mortgage advisor to help guide you through the process and take decisions with the necessary information.
- Inform your mortgage lender about the changes in ownership so that they can assess the new financial situation.
- Contact a solicitor to take care of the legal side of the transaction, such as updating property’s title deeds.
- Agree on terms with all parties involved to be clear on the ownership shares as well as how repayments will be handled.
- Submit your application with necessary documents, signed by relevant parties and remaining or new owners.
- Complete formalities at the UK land registry after transfer is approved by the lender.
Remember that transfer of equity mortgage is not a cheap process so be mindful of the costs. Most mortgage lenders would charge an administrative fee, and solicitors would charge legal fees. These fees may be higher if there are complications such as tax considerations or multiple parties.
Challenges of a Transfer of Equity
When it comes to transferring a mortgage, you may face some challenges on the way. Being aware of these potential issues can help you prepare beforehand.
Affordability checks: If you are adding a new party who may have financial issues like a weak credit score or a default, that hampers the overall affordability check. Similarly, if you are removing someone whose financial profile was what helped you qualify for the mortgage, that will also result in the lender’s hesitation.
Legal and administrative delays: Such a process requires legal guidance as well as compliance with various regulations. If your documents are not filled accurately, or there are disputes among parties involved, you may face delays. Administrative backlogs at the UK Land Registry can also postpone the completion of the transfer of equity process.
Lender refusal: If your loan is tied to strict terms or if your mortgage is almost paid off, lenders may not be up for a change of agreement, transferring a mortgage. In such a case, you may have to seek a new mortgage, which might come with less favourable terms and conditions.
Common Myths About Transfer of Equity
There are several myths surrounding the transfer of equity process that often lead to misunderstandings. It’s crucial to clarify these misconceptions to transfer mortgage smoothly:
“Transfer of equity is just like selling the property”
Property sale is very different from a transfer of equity. The latter is more about changing the ownership structure and it’s a process that takes place usually without an exchange of money.
“No mortgage involvements means no costs”
Even if there’s no mortgage involved, the transfer of equity is still not free. Legal fees and potential tax obligations shall still apply.
“You do not need lender’s approval to remove a partner.”
This is not true. In the UK, all mortgage lenders require to conduct another financial check to ensure that the remaining party can afford the repayments. Therefore, you cannot proceed without your lender’s approval.
“Transferring equity to a family member is tax-free”
In some cases, like transferring a property to a spouse or civil partner, you may need not to pay stamp duty. However, as we discussed before, other taxes might still be applicable.
Conclusion
The transfer of equity can be a straightforward process with careful planning. Whether you are doing it for personal reasons like transfer to family members or due to life-changing decisions, you must ensure you understand the UK’s legal, financial, and tax implications.
At the UK mortgage finder, our line of advisors have a strong grasp of the mortgage industry and have experience working with the transfer of equity cases. Contact us today so we can make the process quick and hassle-free for you.
