When remortgaging your home or raising money for home improvement projects, you don’t need to worry about paying Stamp Duty. That’s because tax is only applicable when purchasing a new property or land.
However, if you’re remortgaging your home and also transferring equity from one person to another (for example, adding or removing a partner’s name from the mortgage), then you may be liable for Stamp Duty.
In this article we look at how this process works and the options available to you.
Stamp Duty explained
When buying property or land over a certain value in England and Northern Ireland, purchasers must pay Stamp Duty Land Tax (SDLT). In Scotland, the tax payable is called Land and Buildings Transaction Tax, while in Wales it is referred to as Land Transaction Tax.
The amount of SDLT payable depends on the value of the property or land being purchased. Properties worth up to £125,000 are not subject to SDLT. The rates of SDLT applicable increase incrementally as the value of the property increases, with different rates applying for residential and non-residential properties.
We are all accustomed to paying Stamp Duty when we buy a house, or a buy to let. But this tax can also become payable when you change one of the owners of a property. This could be adding a person or removing someone from the mortgage.
This is known as a Transfer of Equity.
What is transfer of equity?
When a change in legal ownership of a property takes place, it is referred to as a transfer of equity.
This can occur when one or more people are added to or released from a mortgage loan, often resulting from the breakdown of a relationship between spouses or partners.
A 1:2 transfer refers to one legal owner transferring the property to two people, while a 2:1 transfer means that two legal owners transferring the property into one person’s name. The value of the property after consideration of any outstanding loan is known as equity.
At least one of the original owners must remain on the deeds, after any changes.
A transfer of equity (TOE) will usually take place at the same time as a remortgage. This allows the people named on the mortgage to match the changes in ownership.
Also known as buying someone out, a TOE will often mean that the person leaving receives a lump sum payment in return for their share in the property. Although it is possible to complete a transfer of equity without money changing hands, providing both sides agree on this.
Where a lump sum is needed to buy the additional equity, it may be possible to apply for a larger sum when remortgaging to raise the money needed.
Stamp Duty on a transfer of equity
You may assume that SDLT is only payable when you purchase a property and won’t need to be paid again afterwards – this isn’t always the case. If the owner chooses to transfer part of the property, then it’s possible that there may be an additional SDLT amount to pay.
Married or in a civil partnership
Typically, if you’re married or in a civil partnership and divorcing or dissolving it, you won’t have to pay any Stamp Duty Land Tax (SDLT). That’s because transfers of property between the partners as part of divorce or dissolution proceedings are not subject to SDLT.
This means that if one partner is buying out the other as part of the agreement or court order, then no additional fees will be incurred.
Depending on the circumstances, SDLT may be payable when you transfer a share in a property to your spouse or partner by marrying, entering into a civil partnership, or moving in together. The amount due will depend on whether the consideration given exceeds the SDLT threshold applicable to the type of property being transferred.
When it comes to Stamp Duty, anything of monetary value that is given in exchange for a property transfer is known as chargeable consideration.
When you buy a property normally, the chargeable consideration is the property’s purchase price.
The chargeable consideration for a TOE property transfer is the total price paid, including any fixtures or fittings. This might involve cash, taking on liability for a portion of the mortgage, or a combination of both. It could also include anything of monetary value such as paying legal fees or transferring other assets, like land or property, as part of the agreement.
How does remortgaging work?
When you remortgage a property, the existing mortgage loan is replaced with one from another lender. This could be done to secure a better interest rate or access additional funds. It can also be done when an owner is leaving the property and being bought out by another person who will take on their share of the mortgage.
In this instance, the equity that is being transferred from the person leaving to the other remaining owners will be taken into account and can affect whether stamp duty needs to be paid.
The new owners will need to make a full remortgage application to a new mortgage lender.
This will necessarily mean that you need to provide details of your income and monthly expenses. Yes, a remortgage is based on your income, even if you are not increasing the amount borrowed.
Once the mortgage has been approved the change in names can take place, and will be reported to the Land Registry.
As you are starting a new mortgage with a new lender you have to decide how you want the new arrangement to be setup.
There are several interest rate options available. This includes fixed rate mortgages which offer the convenience of knowing what your payments will be throughout the term of the loan. Alternatively, variable interest rates or trackers can provide a more competitive rate but involve an element of risk as your payments could fluctuate in response to market activity. You could also choose a combination of both fixed and variable to take advantage of market opportunities while still benefiting from some stability.
When it comes to repayment methods for a mortgage, the most common is a capital and interest repayment plan which involves regular monthly payments over a set term. Interest-only mortgages are also available but require a large lump sum payment at the end of the loan period. Finally, you may be able to use an offset mortgage which uses your savings to reduce your interest payments.
The term of a mortgage is how long you have to repay it. This can range from a few years to decades, depending on your preference and the size of loan. Generally, the longer the term of a mortgage, the lower your monthly payments but the higher the total interest payable over the life of the loan.
Your choice of mortgage term will be influenced by your age, as all lenders want to know how you will make the payments if you borrow into your retirement.
When do you have to pay Stamp Duty?
You will have 14 days to file a Stamp Duty Land Tax (SDLT) return and pay any tax due to HMRC. If you don’t submit the return and pay the tax within 14 days, you are likely to be charged penalties and interest.
It’s quite normal for the solicitor to deal with this on your behalf.
Do you need a solicitor to remortgage?
You may well have needed a solicitor to help with a divorce settlement or separation.
In terms of the legal side of a remortgage we will assume that all parties have now agreed on the financial changes planned.
A solicitor, or conveyancer, is always needed for a remortgage. For a simple remortgage they will be registering the new lenders charge against your property. For a transfer of equity they will also be updating the Land Registry ownership records and paying any Stamp Duty owed.
You may wish to use your own solicitor to handle the mortgage side of things, but it is also possible for you to use the lenders solicitor, who may be a bit cheaper.
How do you know if Stamp Duty will be payable?
Once you have all of the relevant figures together you can ask one of our brokers to check how much this will be or ask the same question of your solicitor.
As a bare minimum they will need to know:
- Property valuation
- Mortgage owed
- New mortgage required
- Equity share being bought
- Any other payments being made
Having to pay an unexpected tax bill at the end of a transfer of equity remortgage is never a pleasant surprise, so make sure you ask the right questions before starting out.
It’s normal to have some toing and froing with your solicitor and ex-partner while you get the numbers agreed. But at some point you will agree and you can then speak with one of our advisers to seek out some suitable mortgage deals.
If you don’t have enough cash to pay the tax bill then you may be able to incorporate this sum into the remortgage.
In summary, you may pay stamp duty on a remortgage if it involves a transfer of equity.
The amount payable will depend upon the property valuation, the amount of equity being transferred and the mortgage. It is essential to take legal advice from a qualified solicitor or conveyancer throughout the process to ensure you are aware of all possible costs.
As long as you have done your research, remortgaging can be a beneficial way to secure better loan terms and interest rates on your mortgage.
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