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Transferring Property Ownership To Family Members

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Transferring property ownership to family members is a big decision with implications for both parties. It’s important to know the different ways this can be done, as well as the tax implications and risks of each option.

This article will assist you in the process, looking into whether you should transfer ownership during your lifetime or through your Will on death and the difference between a transfer of equity and a gift.

It will help you to understand the potential consequences of this decision and how to navigate it.

Table of Contents

Transfer of equity

Transfer of equity is the process of transferring a portion of a property’s ownership to one or more people while the original owner stays on the title deed.

If you have a mortgage, you must get permission from your mortgage lender to alter the current mortgage before proceeding with the equity transfer. The new owner may become responsible for making mortgage payments.

Reasons for transferring equity

There are several reasons why transferring equity may be necessary. These could be related to wealth distribution, fairness, or taxation. Common scenarios include:

  • Transferring to a spouse or civil partner.  Newlyweds may wish to share their assets or balance the value of their assets.
  • Separation, divorce, or dissolution of a civil partnership.  Equity may need to be transferred as part of a settlement.
  • Transferring to a child.  Parents may want to help their children enter the property market, educate them about owning property, or reduce inheritance tax in the future.
Transferring Property Ownership To Family Members
Transferring to a spouse or civil partner.  Newlyweds may wish to share their assets or balance the value of their assets.

Joint tenants or tenants in common

Property can be held jointly or as tenants in common. When owned as joint tenants, the entirety of the property is owned together, without any distinction of it being split equally between the owners.

When one of the owners passes away, the other retains full ownership of the property.

In contrast, tenants in common allow the owners to possess unequal portions of the property and to pass on their share after death. If the new owner won’t own an equal portion, then the property must be owned as tenants in common.

Tax implications of transfers of equity

Let’s look at the tax implications of equity transfer:

Value of the property at the date of transfer

When transferring equity, you may need a valuation of the property on the date of the transfer to calculate taxes.

Capital gains are the difference between the purchase price and the current value. Considering that valuations are subjective, it is wise to ask for a realistic valuation.

Stamp Duty Land Tax (SDLT)

Stamp duty is payable if the value of the transfer is more than the current threshold of £125,000.

No SDLT needs to be paid if the transfer is due to divorce or dissolution of a civil partnership.

However, if you transfer property to your children, then they (or you) will have to pay stamp duty.

What is a Capital Gains Tax
Calculating capital gains can be complicated following separation, but you won't have to pay CGT if you have lived together in the property during the tax year (6 April to 5 April of the following year).

Capital Gains Tax (CGT)

You may be liable to pay Capital Gains Tax (CGT) if the property you’re transferring isn’t your Principal Private Residence (PPR) or if you’re transferring your PPR to someone other than a sibling, spouse, civil partner, or child.

You won’t be liable to pay CGT if the property is your only home.

Calculating capital gains can be complicated following separation, but you won’t have to pay CGT if you have lived together in the property during the tax year (6 April to 5 April of the following year).

Gifts

Giving away property is a popular way for parents to give property to their kids while minimising inheritance taxes. It’s an effective way to transfer wealth without having to pay a lot of taxes.

However, have you considered what happens if your child gets married and later divorced?  What if you are living at the property, and after transferring it, your relationship breaks down, and you are asked to move out?

It is important to get sound legal advice to protect against these scenarios.  Or you could sell the property instead.  More on that later.

Inheritance Tax (IHT)

Despite inheritance tax being associated with death, it is actually a tax on the transfer of assets, payable after you pass away. To save inheritance tax, it is advisable to give your property to a child at least seven years before you plan to die.

Making a gift of property during your lifetime is an effective way of minimising the tax burden.

Transfers of property to spouses and civil partners are exempt from IHT. However, this is not the case for transfers to non-married life partners.

Why make a gift of property to a child well before you die
If the gift was made between three and seven years before your death, its value in your estate will be discounted.

Why gift A property to a child well before you die

The inheritance tax rate starts at 40%. It only applies if the value of your estate is above the total of both of your allowances, which are known as ‘thresholds.’

The two thresholds are the ‘Nil Rate Band’ of £325,000 and the ‘Residence Nil Rate Band’ of £175,000 if you transfer any of your main residence to a family member who is eligible, such as a child, in your will.

In summary, if you are a homeowner and leave your property to your children, you will only pay inheritance tax on your estate if it is worth more than £500,000 at the time of your death. If your spouse or civil partner leaves their estate to you, you may also inherit their thresholds, giving you a total of £1,000,000.

IHT tax rules are complex. Gifts made within seven years of your death may be included in your estate. If the gift was made within three years, it will be included in your estate at the time of death.

If the gift was made between three and seven years before your death, its value in your estate will be discounted.

Living in your home after gifting it to a family member

HMRC will assess whether a gift was given to avoid Inheritance Tax.

If a property is bequeathed to a child or relative to reduce your assets for care fee assessment, a local authority can determine if it was done to disguise property wealth (known as a ‘deliberate deprivation of assets’).  More importantly, if you later move into care, your property may be sold.

If you stay in your home after giving it away, you will have to pay rent at the local market rate for the share you don’t own. You cannot live free of charge.

Many people think that they can avoid paying rent by transferring money to their child and then having the child loan it back. However, your children will be liable to pay income tax on the rent, meaning they won’t be able to loan the full amount back.

How Long Does It Take to Transfer Ownership of a Property?

Transferring ownership of property typically takes four to six weeks from beginning to end. The timeframe depends on several elements but largely revolves around the efficiency of your solicitor.

Delays are usually the result of external factors, such as needing to wait for paperwork.  Remember that you can only transfer a property if you own it mortgage-free.

Requirements for giving property as a gift to a family member
Any outstanding mortgage amount must be paid off before it is transferred.  This also applies if you have taken a reverse mortgage, also known as equity release.

Requirements for giving property as a gift to a family member

A Deed of Gift must be done correctly for it to be valid. It is essential to confirm that the current owner is of sound mind and is not acting under pressure.

Any outstanding mortgage amount must be paid off before it is transferred.  This also applies if you have taken a reverse mortgage, also known as equity release.

Capital Gains Tax should also be taken into account. This is determined by the difference between the value of the property when it was initially purchased and its value at the time of transfer.

Risks of gifting property

When you give away a property, you lose control over its destiny while alive and after you have passed.

The new legal owner can sell the property, regardless of their share of it. If you and the new owner disagree, they can opt to sell or force a sale through the court.

With gifts of property to a child, the worry is less that they might sell or evict you and more that they may lose their ownership in a divorce settlement, leaving you in a vulnerable spot.

In such a case, the ex-spouse could end up with half the share of the property, giving them the authority to sell.

Another risk is that the new owner dies, and their Will (or the rules of intestacy) dictates that the property goes to someone who has not agreed to let you keep living there.

Capital gains tax may be an issue if the property is not your main residence. This applies to second homes, rental properties, and even your home if your children become owners but no longer live there.

Would it Be Easier To Sell Instead?

Transferring your home to family members, particularly children, can be a great way to reduce inheritance taxes and give them a leg up on the property ladder.

However, it is important to be aware of the potential risks and tax implications. We recommend you seek advice from a solicitor on the process and how to manage the risks.

Knowing the process and understanding these risks can help ensure your family’s wishes are respected, and any legal or financial issues are avoided.

Another option is to sell the property, release the equity, downsize, own your new property outright and then gift money to your children.  

This avoids all the risks.  Your children could sign a pre-nuptial agreement.  

A pre-nuptial agreement is a contract made by a couple before marriage or entering a civil partnership. It outlines how assets will be divided in the event of a divorce or dissolution of the civil partnership. The agreement can cover things like property, savings, income and debts.

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