A Transfer of Equity is a legal process where ownership of a property is changed by either adding or removing a person’s name from the title deeds. This can occur in various scenarios such as during a divorce, gifting property to a relative, or buying out a co-owner. While this may seem like a straightforward transaction, it’s essential to understand that there are potential tax implications when transferring equity in a property.

For specific advice on your situation, CANGAF Accountants can help you navigate the complexities of property-related tax matters.

When Is Tax Payable on a Transfer of Equity?

There are two main types of taxes that may be payable when transferring equity:

1. Stamp Duty Land Tax (SDLT)
2. Capital Gains Tax (CGT)

Let’s break these down in detail:

1. Stamp Duty Land Tax (SDLT)

Stamp Duty Land Tax (SDLT) is a tax on property transactions in England and Northern Ireland. It applies when there is a transfer of equity, but only under certain conditions.

When Is SDLT Payable?

SDLT is payable if there is a consideration (payment or assumption of debt) during the transfer of equity. The key factors include:

• Outstanding Mortgage: If the person receiving equity takes on a share of the mortgage, this is considered a form of consideration, and SDLT may be due on that amount. For example, if you transfer half the property’s equity to someone, and they take on 50% of the outstanding mortgage, SDLT may be payable on the value of the mortgage assumed.
• Payment Made: If any payment is made by the person receiving the equity, SDLT is payable if this amount exceeds the SDLT threshold, which is currently £250,000 for residential properties (as of 2023/24).

SDLT Rates

The rates for SDLT depend on the value of the consideration. For residential properties, the SDLT rates are as follows:

• Up to £250,000: 0%
• £250,001 to £925,000: 5%
• £925,001 to £1.5 million: 10%
• Over £1.5 million: 12%

If the transfer is related to a divorce or separation agreement, there may be no SDLT payable. In such cases, the transfer of equity is exempt from SDLT as long as it’s part of a court order or formal separation agreement.

2. Capital Gains Tax (CGT)

Capital Gains Tax (CGT) applies when you transfer a property that is not your main home, and there is an increase in the value of the property. CGT is a tax on the profit made when you dispose of or transfer an asset.

When Is CGT Payable?

CGT is typically payable when:

• The Property Is Not Your Primary Residence: If the property involved in the transfer of equity is a second home, rental property, or investment property, you may need to pay CGT on the increase in value from when you originally acquired the property to the time of the transfer.
• Gifting Property: If you gift a property or a share in a property to someone, CGT is payable on the market value of the property at the time of the transfer, even if no money changes hands.

CGT Rates

The rate at which you pay CGT depends on your overall income and the type of property being transferred. The rates for residential property are:

• 18% for basic-rate taxpayers.
• 28% for higher-rate taxpayers.

You are entitled to an annual CGT allowance, which is currently £6,000 (2023/24). This means you can earn up to £6,000 in capital gains before having to pay any tax.

3. Inheritance Tax (IHT)

While Inheritance Tax (IHT) isn’t immediately payable during a transfer of equity, it’s important to note that if you gift property and pass away within 7 years of the transfer, the property may be subject to IHT under the 7-year rule. If the property is transferred as part of a gift, and you survive for more than 7 years, it will be exempt from IHT.

Scenarios When Tax Is Payable on Transfer of Equity

There are several common scenarios where a transfer of equity might occur, and the tax implications can vary depending on the specifics of the transaction:

1. Divorce or Separation

When transferring equity during a divorce or separation, such as one partner buying out the other’s share of the family home, SDLT and CGT may be payable under certain conditions:

• SDLT: If one partner takes over the entire mortgage, SDLT may be payable on the value of the mortgage assumed, unless exempt under divorce rules.
• CGT: If the property is a second home, CGT may be payable on the value of the share transferred.

2. Adding a Partner to the Mortgage

When adding a partner or spouse to a property’s mortgage, SDLT may be payable if they take on part of the mortgage, and the value exceeds the SDLT threshold. For example, if you add someone to the property deeds and they take on a share of a £300,000 mortgage, SDLT will be payable on the portion of the mortgage they assume.

3. Gifting Property to a Family Member

If you transfer equity as a gift to a family member, there is usually no immediate SDLT unless the recipient takes on a mortgage. However, CGT may be payable based on the market value of the property at the time of transfer, especially if it’s a second home or rental property.

4. Removing a Name from the Deeds

If you remove a co-owner from the property deeds and they are relieved of their mortgage liability, SDLT may be due on the value of the mortgage they are no longer responsible for. CGT may also be payable if the property has appreciated in value and is not the primary residence.

How to Calculate Tax During a Transfer of Equity

To determine whether you’ll need to pay tax during a transfer of equity, follow these steps:

1. Establish the Value of Consideration: Determine whether the person receiving equity is taking on a share of the mortgage or making any financial payments. If the consideration exceeds the SDLT threshold, SDLT will be due.
2. Determine Property Type: If the property being transferred is a second home, rental property, or investment, CGT may be payable.
3. Check SDLT Rates: Use the current SDLT rates to calculate the tax due based on the value of the mortgage or consideration.
4. Check for CGT Liability: If the property is not your main home, calculate the capital gain based on the market value and apply the appropriate CGT rate.

How CANGAF Accountants Can Help

Navigating the tax implications of a transfer of equity can be complex, especially if you’re unsure about your obligations. CANGAF Accountants can provide expert advice and assistance in ensuring you stay compliant with HMRC, calculate any tax liabilities accurately, and make the most of available tax reliefs.

Whether you’re transferring equity due to a divorce, gifting property, or adding a partner to the mortgage, our team of experienced accountants can guide you through the process and help you minimize any tax liabilities.

Contact CANGAF Accountants today to get personalized tax advice on your transfer of equity:

• Address: 235 Tonge Moor Road, Bolton BL2 2HR
• Email: info@cangafltd.com
• Phone: 01204 859315

Conclusion

A transfer of equity can trigger tax liabilities, particularly when SDLT or CGT comes into play. Understanding when tax is payable during a transfer of equity and how to calculate it is crucial for staying compliant with HMRC. Whether it’s SDLT on a shared mortgage or CGT on a second property, knowing the rules will help you plan your transfer effectively.

If you’re unsure about your specific tax obligations, consulting with CANGAF Accountants can ensure you’re fully prepared for any tax implications, helping you manage the process smoothly and avoid unexpected tax bills.