Transfer of Equity
Transfer of Equity is a legal term referring to the transfer of the legal ownership of a property. It is different from buying and selling a property (in which also the legal ownership is transferred) in that there is usually no money changed hands by the parties involved. A very simple example, is where a property owned jointly by a couple and the husband transfers its share of the property to his wife as a gift.
In the common legal jargon sometimes 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 also referred to as transfer of equity. The important point to remember is the equity in the property is different from the value of a property. For example, if a house is worth £400,000 with an outstanding mortgage of £300,000, the equity in the property is £100,000. So a husband may transfer the equity of the property to his wife as a result of the divorce settlement provided the wife accepts to pay the mortgage on the property.
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. However, if there is a mortgage on the property, there may be some tax implications for the parties. For example, if A owns a house that is valued at £400,000 with an outstanding mortgage of £300,000 and if A transfers half of his ownership to B as a gift, then B will be responsible for half of the outstanding mortgage (£150,000). For SDLT purposes B’s liability is therefore calculated based on his obligation 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 possible 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 transfers of equity are effectively a gift or transactions at undervalue, the law allows for transactions to be set aside in cases of bankruptcy or insolvency. 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.
By Alireza Nurbakhsh, 15th December 2016.