Hello, everyone my name is Matthew Taylor and I am the Business Development Director at Equilaw. Today, I am joined by Malcolm Emery of Legal Studio Solicitors. Malcolm is a solicitor and chartered tax advisor who specialises in tax, trust, and probate matters.

In today’s podcast Malcolm is going to provide some practical guidance on issues relating to properties that are co-owned and where the applicant would like to release equity from the property.

Malcolm, when reviewing the legal ownership of a property we will often come across situations where there are multiple co-owners, but only one of the co-owners lives at the property. For an equity release application to proceed the applicant must be the sole owner of the property. Are you able to explain the type of situations when this might happen?

This type of situation is very common where a parent has owned the property and they have left it equally between their children and one of the children lived in the property with their parent and this occupation has continued after the parent’s death. At some point in the future the co-owner who is living in the property decides they would like to release equity from it and is advised that their equity release can only proceed if they are the sole owner of the property.

Thank you, so what will usually happen next?

The co-owners of the property who are not living at the property will need to obtain independent legal advice on the options available to them which are:

1. Do nothing and retain their interest in the property, although this does mean that the occupier’s equity  is unable to proceed
2. Sell their interest in the property; or
3. Gift their interest in the property.

So if the co-owner agrees to assign their interest in the property to the occupant, how is this actually dealt with?

The co-owner would need to sign a document called a deed of assignment. This document will evidence that the co-owner has assigned their beneficial interest in the property to the occupant.

Would the occupant also need to sign the deed of assignment?

Yes, the occupant will need to sign the deed of assignment. They are signing the document to confirm that they accept the terms on which the assignment is being made.

Apart from signing the deed of assignment does the co-owner, who is assigning their interest in the property need to think about anything else?

Yes, the tax implications relating to the assignment will need to be considered.  There are two taxes to be considered, namely inheritance tax and capital gains tax. If a gift is being made this is treated as a potentially exempt transfer for inheritance tax purposes. Which means they must survive the gift for a further 7 years to avoid a tax charge arising. For Capital Gains Tax purposes most family members are treated as connected persons, which means that any transactions undertaken between them are treated as taking place at market value. Therefore, a family member may be prepared to gift their interest in the property to the occupant. Although they are not receiving any consideration for their interest in the property, HM Revenue & Customs will deem them to receive full market value for their interest.

So does this means the co-owner who is gifting their interest in the property, could actually end up with a CGT liability?

Yes, that is correct. Tax changes introduced in 2020 now mean that any CGT liability must be paid within 30 days of the assignment of the property being completed.

You mentioned that the CGT is payable within the 30 days of the assignment being completed.

For CGT purposes the beneficial interest in the property is deemed to be disposed of on the date that the deed of assignment is completed. This is the date that the document is dated.

Ok thank you. What about if the occupant of the property agrees to pay the CGT liability. Does this change the position?

Yes it does. In this type of situation the transaction will not be treated as a gift. Instead, it will be treated as a sale at an undervalue and it will be necessary for the deed of assignment to show that the property is being sold. In addition, Equilaw who are acting for the equity release applicant will be required to pay the sale proceeds to the solicitor representing the co-owner who has disposed of the interest in the property.

I suppose the new rules mean requiring payment of the CGT liability within 30 days of the assignment being completed can really cause cash flow problems in certain situations. Could you expand on those situations?

If the property is not owned by the individual who is applying for the equity release the lender will usually require that the legal title to the property is to be transferred into their name before their equity release can proceed.  In situations where the property was inherited, and one or more co-owners need to assign their interest in the property to the equity release applicant the deed of assignment will need to be completed, so that the equity release applicant becomes the sole owner of the property.  However, completing the deed of assignment will mean the CGT liability will become due and payable 30 days later.

If the co-owner assigning their interest in the property is relying on funds from the equity release to pay their CGT liability the funds may not be available in time to pay the tax due.

Thank you Malcolm, are there any tax planning opportunities available to avoid capital gains tax charge arising on the assignment of an interest in a property?

If the property was inherited under a will or the rules of intestacy within the previous two years and the co-owner who has inherited a share of the property is willing to gift as opposed to sell their interest in it, then providing the gift is documented via a deed of variation, as opposed to a deed of assignment, this will avoid a CGT charge arising.  This is because under the gift of the interest in the property, it is deemed to be made by the deceased owner for CGT and IHT purposes. Whilst a deed of variation is a useful way to avoid IHT and CGT liabilities arising, certain provisions must be included in the document for it to be valid and therefore professional advice should always be obtained.

Thank you, that’s really helpful. Are there any other issues that need to be considered before the assignment of the property is completed?

If the co-owner is gifting their interest in the property or selling it at an undervalue, then they should consider their own financial position first.  As their interest in the property has a monetary value a trustee in bankruptcy could become interested if they are having financial difficulties and suddenly become bankrupt. Equally, if they are in the middle of a divorce their spouse could argue that the value of their interest in the property should be taken into account in any divorce settlement.

Excellent, great stuff this really helpful and something we are seeing more and more of over at Equilaw in terms of completing equity release applications. Just one more question for you if I may, is there anything else that the co-owner applying for the equity release needs to consider?

Yes, they should ensure that their Will is up to date and they should also consider putting a property & affairs and lasting power of attorney in place. This will enable decisions to be made about their financial affairs if they lose capacity and are unable to do this for themselves.  This is very important if the equity release has a drawdown facility attached to it. As the application process for the registration of the lasting power of attorney can take over 3 months to complete this matter should be given immediate attention.