For most people, home buying is the biggest purchase they will ever make. However, there may be times in your life when your circumstances change and, you feel like transferring part of the full ownership of your home to another family member, particularly to your children. You can transfer some of your equity to the home or give it all away. You must be aware of the risks so that you can make the right choices for yourself.
What is the equity transfer?
Adding people to property, while retaining shares is called a transfer of equity. Such transfers are quite common when newly married homeowners wish to add their spouse to the home title deed. In contrast, equity transfers usually happen when the spouse who has married the owner decides to separate. Parents may also wish to transfer equity to their children’s homes to minimize the impact of later inheritance taxes.
Transferring equity is not without fees – and it is important to understand that people who acquire capital may have to pay stamp duty or capital gains tax on the transaction. If you receive equity and a mortgage of more than £ 125,000, you will have to pay stamp duty and taxes on the equity above that threshold. (Note: As part of the celebration of the COVID-19 emblem, temporary changes to the emblem are currently in effect.)
If you transfer equity due to divorce or termination of a civil partnership, you do not need to pay stamp duty, but you may have to pay capital gains tax based on whether you lived together during the tax year you lived together and the transfer was complete.
If you are considering sharing the equity in your home, you will also have to decide what type of co-ownership you want. You and the people you share can be:
As a co-tenant, you own an equal share of 50% of the property. When one person dies, ownership of the property is automatically transferred to the other spouse. You cannot transfer ownership of property against your will.
However, co-tenants can own different percentages of the property, and if one person dies, ownership does not automatically transfer to the other party. This is common with divorced couples who share property. This means that you can transfer parts of your property at your will to whomever you want.
Sometimes people gift their entire house to family members – this is known as a “gift transfer” or “gift certificate.” Parents often choose to reduce the amount of Inheritance Tax (IHT) their children must pay after their death. Inheritance tax starts at 40% and applies to total assets (including property) above the non-tax threshold of £ 325,000. If you gift property to your children while you are still alive, the inheritance tax can be deducted.
If you die within 7 years of donating goods, your children still have to pay inheritance tax. However, if you die between the ages of 3 and 7, the amount of inheritance tax your children will have to pay will gradually decrease.
Things to consider before you start …
Married spouses or spouses can also donate part of their property instead of transferring equity. In this case, you will not be charged stamp duty or capital gains tax because no money is involved in the transfer. There are several things to consider before you start giving away your home.
If you have a mortgage or debt on the property, you will need to pay it off before you can give it to someone else. It is also important to consider your financial situation in the face of potential bankruptcy. If you donate your home and go bankrupt within five years of the transfer, the authorized trustee may have the right to reclaim the property if the transaction is believed to have been intentional to keep the property out of the reach of the creditor.
You also need to think about where you will live after you donate the property. You can continue living in your home after the transfer. However, to avoid tax consequences, you must pay the rent at the current market price of the person you are transferring. If there is no lease or similar contract, you do not have the legal right to live on the property.