Transfer of Equity

Redrobbin596

I bought a property jointly with my mother when I was at university. After qualifying I moved out, paid my mother the capital she had invested and we continued to let it with the mortgage being covered by the rent.

I am now in a position where it will be potentially difficult for me to remortgage due to my mother's age. Discussing this with the mortgage company they suggested a 'transfer of equity'. My mother is happy for the ownership of the property to be transferred however we are a bit concerned regarding the potential capital gains tax liability.

I just wondered if anyone has any experience of doing something similar or could advise on potential solutions.

Many thanks.

Tixy

Have you worked out whether there is actually likely to be a cgt liability and if it is likely to be more than her annual allowance (assuming she has no other capital gains in the tax year).

Redrobbin596

Thanks - Yes - there is likely to be a significant capital gains tax liability as far as I can work out which would exceed her annual allowance.

Someone suggested that it might be possible to do the transfer over several tax years - I am not sure if that would work to reduce it a bit?

TBagpuss

I think you would need to get some professional advice.

It sounds as though you paid back your mum the capital she invested and that you and she have treated the house as belonging to you ever since - which may be relevant.

Are you going to be paying her anything for the share of the equity which has built up since you bought, or is she effectively giving that to you?

StuC75

depending on the property value there may also be Stamp Duty liability (know I had to pay for sols to complete a return when completed a ToE to take the ex off the mortgage) - though the valuation \ remortgage came in at under that share..

Redrobbin596

TBagpuss - yes you are exactly correct.

My mother would effectively be giving her share (which amounts to the mortgage plus the uplift value).

I realise that there may be some stamp duty liability - if it were transferred in sections each below the stamp duty threshold would that make a difference?

TBagpuss

I think they would treat it as a single transaction unless you could demonstrate that there was a good reason (i.e. not just trying to avoid paying tax!) why it was being done in stages.

Redrobbin596

Thanks. With regards to the capital gain or the stamp duty?

Would you know what rate the capital gain would be charged at? On the HMRC website it suggests either 18% or 28% depending on income. Is this treated as part of standard income tax?

The difficulty is that although we have made a potential gain, without selling the property that gain hasn't actually been realised, leaving something of a funding issue!

00ec25

breaking it down into chunks will not work - here is why....

Mortgage
who has the mortgage? You repaid your mother her "capital" , do you mean the deposit she invested or do you mean she paid off her mortgage using the "capital" repayment from you leaving the remaining debt solely in your name?

if she is still named on the mortgage then she cannot "transfer" it to you. She will have to pay off her debt and you will have to get a mortgage wholly in your name

Stamp Duty Land Tax
SDLT is liable where the taxable consideration given and received is more than the SDLT threshold. The consideration is the physical cash which passes from you to mother (or vice versa). If no cash changes hands, ie the equity in the property is purely gifted to you, then SDLT is irrelevant

if SDLT is relevant then the "linked transactions" rule means that if you do it in chucks this will be ignored and the sum of the parts will be used to determine if the SDLT threshold has been crossed and so the whole lot will be subject to SDLT

CGT
the CGT situation is complex as you have not explained enough background to be accurate as to the advice ...

Rules
a) you and she are "connected persons"
b) potentially (see below!!!!) the gift from her to you is a "CGT disposal" which crystallises her CGT liability as it is treated as though she had sold her share
c) the sales value used in the calculation must be the open market value (see Step 1) of the property at the date of transfer, not whatever value you and she decide it is
d) liability for CGT always rests with the beneficial owner, this may not always be the legal owner
e) if you try to do it in small bites over two or more tax years this will be seen as asset splitting/exploitation and may work once but probably won't a second or subsequent time meaning it will be re aggregated into a single calculation

background complexity
as above re the mortgage, if she was repaid her capital in the past then it is unclear if she still retains any ownership rights at this time. Unless her capital was formally treated as a repayable loan, then she has already partly disposed of her part of her share of the property and should previously have done a CGT declaration at the time of that disposal

if you have been solely receiving all the rent since the date of the "capital repayment" then there is a strong case to argue you are now the sole beneficial owner and that your mother's CGT liability was in fact many years ago when you repaid the capital

if on the other hand the income has been split between you and her then you are both the beneficial owners and if she now gifts any of her remaining share to you then yes she has made a (further) disposal at market value and is liable for the gain between her share of the original cost (adjusted for any repayment already made) and its current market value

you need to take professional advice because on the mix of info you have presented so far it is a potential dogs breakfast

amount payable
the 28% rate applies to the amount by which your total income (after income tax personal allowance is deducted) exceeds £31,865 (which is the higher rate income tax threshold).
example:
you have a net gain of £100,000 (after deducting your CGT personal allowance) and you have a job which pays £25,000 pa.
Your income tax personal allowance for 14/15 is 10,000 leaving you 15,000 subject to income tax
your total "income" for the year is £125,000
of that income
10,000 is (income) tax free
15,000 is subject to income tax leaving 31,865 - 15,000 = 16,865 of the income tax basic rate remaining
so 16,865 is subject to CGT at 18%
and the rest of the gain is subject to CGT at 28% (ie 125,000 - 10,000 - 15,000 - 16,865 = 83,135 @ 28%

Redrobbin596

Thanks 00ec25 - really appreciate the detailed reply. I will get some professional advice. We did in fact consult an accountant a few years ago - At the time he advised splitting a gift over two years, but I can see that this may be far from a straightforward solution.

In terms of the capital she was repaid by increasing the mortgage which is held jointly - which further adds to the complexity. The rent has been paid into a joint account which has been used to pay the mortgage and expenses for maintaining the property.

In terms of the SDLT from reading the HMRC website I understand that the mortgage could be considered part of the cash transfer making it liable? I guess there is a possibility I could borrow the outstanding debt on a bridging loan for the duration of the transfer and remortgage immediately afterwards although I would clearly need a reasonable assurance of there being minimal delay in this process? How would that affect things?

So from what I understand even though the gain resulted in income that was over the higher rate tax threshold it would still be taxed at a maximum of 28%?

You are absolutely correct - I will get some professional advice, I just want to make sure I am as informed as possible prior to going in to the meeting and have an idea of any potential solutions or avenues to discuss.