Transferring property from one family member to another can have legal, practical and financial benefits. As such, there are multiple instances in which a property owner may choose to transfer ownership to another party.
A parent may consider transferring property ownership to a child so they can potentially reduce their Inheritance Tax liability and retain more (or all!) of the property’s value.
Although transferring property ownership can be a savvy way to protect your family’s interest, the process can also be confusing and complicated. Due to this, it’s always advisable to seek professional, independent legal advice before making any major property decisions or transactions.
What Does Transferring Property Ownership Mean?
In simple terms, transferring property ownership simply means that you are giving ownership rights to one or more parties. However, there are different ways to transfer ownership of a property, and the method you use could have a varying outcome.
If you essentially want to ‘share’ ownership with a family member, for example, you may consider a transfer of equity. In such cases, the original owner would retain a proportion of the equity and remain as a registered proprietor. This means you would retain some ownership rights over the property, despite gifting a proportion of the equity to another party, such as a child.
Alternatively, you may want to transfer the entirety of the property over to another party. If so, this can also be achieved via a transfer of equity, but you will be transferring the entirety of the equity to the recipient. This is referred to as a ‘whole equity transfer’ and means that the legal and beneficial interest in the property is transferred to a third party, such as a family member. As a result, you would not retain any ownership rights.
As you can see, transferring property can have varying outcomes based on the type of transfer you use. It’s vital, therefore, that you are fully aware of the implications that a property transfer will have on your own rights and interests.
Can You Transfer Property Ownership to Your Child?
Yes. The owner of a property can transfer ownership to anyone over the age of 18, including their child or children.
Often, parents will transfer property ownership to an adult child or children to help them get on to the property ladder or to relieve the future burden of Inheritance Tax.
Transferring Property Ownership to a Minor Child
If your child or children are under the age of 18 years, they cannot legally acquire or hold property, but they can have a beneficial interest in a property. In this scenario, the equity can be held on trust for the beneficiary (child) until they are at least 18, at which point the property can be transferred to them.
When a trust is created, one or more trustees must be appointed to manage it. If you want to create a trust so that property ownership will be transferred to a child once they are at least 18, you will need to use a Declaration of Trust.
Again, there are different types of trust that can be employed. A ‘bare trust’ means the property is held on the trust for the beneficiary child ‘absolutely’. In other words, the child has an immediate and absolute right to the capital and income from the trust. Alternatively, a ‘discretionary trust’ can be used if you want to retain more control over the asset.
Once you’ve created a trust and transferred your property into it, you are no longer its legal owner. Even if you are acting as a trustee, the asset (property) must be managed in the beneficiary’s interest. You have effectively relinquished your ownership rights and there is no way to reverse this, so be absolutely sure you’re comfortable with this scenario before you begin the process.
How to Transfer Ownership of a Property
The legal mechanisms for transferring ownership are relatively straightforward, but you will need to ensure that the correct documentation is provided and witnessed. The documentation required will depend on how you’re transferring the property and whether you’re transferring ownership of the entire property or a proportion of it.
What Document Transfers Ownership of a Property?
There are multiple different documents that can be used to transfer ownership of a property, including:
TR1/TP1
If you are transferring an entire property, you’ll need to complete a TR1 form. Alternatively, a TP1 form can be used to transfer a proportion of a property.
Deed of Trust
If you want to transfer your property into a trust, a Deed of Trust must be drafted to set out the terms of the trust. In addition to this, many types of trusts must be registered with HMRC.
AP1 Form
You must complete and file an AP1 Form to register the change of ownership with the Land Registry.
How Long Does It Take to Transfer Ownership of a Property?
It depends on what type of transfer you want to make. Straightforward transfers can take as little as 3 to 4 weeks, while more complex transfers can take up to 12 weeks to complete. If there is a mortgage on the property, it may take a little longer to facilitate the transfer as the mortgagor will need to be made aware of the transaction.
How Much Does It Cost to Transfer a Property?
The cost of transferring a property depends on the type and complexity of the transaction. However, conveyancing can be relatively cost-efficient, so you may be surprised at how economical the process can be.
What Are the Tax Implications of Transferring Property?
To date, there are three main types of tax that you need to take into account if you’re considering transferring property to a family member: Inheritance Tax, Capital Gains Tax, Stamp Duty Land Tax and Income Tax.
Inheritance Tax
People often assume that transferring property to a family member will enable them to limit their Inheritance Tax liability. If the deceased’s estate is valued at £325,000 or more, Inheritance Tax is currently applicable at 40%, subject to specific exemptions. However, Inheritance Tax is applied on a sliding scale for up to seven years post-transfer. So, if you die within seven years of making the transfer, the recipient will be required to pay a reduced amount of Inheritance Tax.
Remember – if the recipient (child) allows you to continue living in the home post-transfer, you’ll need to pay them market rent, pay a share of the bills and live there for at least seven years to avoid it being classed as a ‘gift with reservation’ and being subject to Inheritance Tax.
Capital Gains Tax
Reducing Inheritance Tax liability may make transferring property seem like an attractive option, but don’t overlook the potential Capital Gains Tax liability you could incur. When you dispose of (e.g. sell or gift) an asset that has increased in value since its purchase, you’re liable to pay tax on the amount it has gained.
Although you aren’t usually required to pay Capital Gains Tax on a property that’s not your main home, you are liable to pay it on other types of property assets, including inherited property in some instances.
Transferring property to a family member via a trust could even attract double the Capital Gains Tax liability, as the original owner (the ‘settlor’) will pay tax upon putting the property into a trust and the beneficiary may need to pay Capital Gains Tax when he or she becomes entirely responsible for the property, if it has increased in value since the trust was created. However, ‘holdover relief’ may be applicable if the property could be subject to Inheritance Tax, in which case the Capital Gains Tax liability is ‘held’ until the property is actually sold.
Stamp Duty Land Tax (SDLT)
Stamp Duty Land Tax (SDLT) is payable on the transfer of properties where the chargeable consideration is over the SDLT threshold. You will need to consider whether the transfer will incur a liability for SDLT.
Income Tax
If revenue is generated from the property, then its owner may also be liable to pay Income Tax. Remember – if you want to transfer your property to a child or family member and remain living in it, you’ll need to pay them market rent to limit the subsequent Inheritance Tax liability. As a result, the rental income the new owner receives will be considered income and subject to Income Tax.
Contact Heald Nickinson Now
To learn more about transferring property ownership to a child or family member, get in touch with our expert Family Law solicitors.
Call us on 01276 680000 or send us a message via our contact form.
