Buying Somebody Out Of Your Property

If you own a property with somebody else, at some point you may want to bring that arrangement to an end. Your relationship may have broken down, or your needs may simply have changed. Perhaps you inherited a property jointly with a sibling but now want the cash to buy your own home.   

‘This process is often called a ‘transfer of equity’ and the mechanics for it are relatively straightforward,’ explains Rebecca Handford, a Partner in the residential property team with Sills & Betteridge. ‘However, the surrounding issues can be complicated. Getting expert legal advice will ensure your intentions are correctly reflected and can avoid complications in the future.’

Here Rebecca looks at transfers of equity, and what you need to consider if you want to buy out a co-owner’s share.

Legal and beneficial ownership, and the transfer of equity

We often use the term ‘transfer of equity’ to describe the process of changing ownership where at least one of the original legal owners stays the same.

People sometimes talk about ‘changing the names on their deeds’ in the context of co-ownership. While that may be a by-product of the process, it usually needs a transfer of the parties’ interests in the property. This is because of the way land is owned in England and Wales.

Basically, there are two ways to own a property; legally or beneficially. You are the legal owner if title to the property vests in you. If the land is registered, you will be the person entered as proprietor in the register of title at the Land Registry. If you are the beneficial owner, you are entitled to the value in the property, but you may not necessarily be the legal owner.

In practice the beneficial and legal owners are often the same person, for example when a husband and wife own a property jointly. Both are registered as owners at the Land Registry, so both will share the proceeds when they sell. However, there are situations where the legal and beneficial ownership is different. For example, parents may own a property on trust for themselves and their children. The parents are the legal owners, but the beneficial owners are the parents and their children.

A transfer of equity happens when you change the way you own property beneficially. In practice, this often also entails a change in legal ownership.

For example, take the case of a relationship breakdown. Say you own your home jointly and buy your partner out. You then own the property absolutely. There is, therefore, a transfer of the beneficial interest. However, for a clean break, you will also want a transfer of the legal title. This would be from you and your ex-partner to you alone or, if you wanted to own the property jointly with a new partner, from you and your ex-partner to you and your new partner jointly.

For the transfer to be effective, it is important to follow all the necessary legal formalities. Failure to do so may result in unintended consequences. For example, if a former co-owner remains on the register of title at the Land Registry, this could cause a problem when you sell.

Reach an agreement

There may be a trust deed or other document regulating the co-ownership, which provides for a transfer in certain circumstances. If so, you should check its provisions. In the absence of an express provision, you cannot generally force another co-owner to sell their share to you. You may be able to force a sale of the property on the open market, although you may need a court order. Fortunately, this is rarely necessary. In most cases, you can negotiate a buyout with your co-owners and this is usually the best way forward.

If you cannot reach agreement, or a dispute looks likely, you should seek legal advice without delay. Similarly, if you are considering a transfer of equity in the context of divorce or the dissolution of a civil partnership, special considerations may apply.

Establish the basis of your ownership

Before agreeing a buyout, you should clarify the basis of your beneficial interest in the property.

First, you need to establish whether you own the property beneficially as joint tenants or tenants in common. If you are joint tenants, then you will own equal shares in the property with your co-owners. Before you can buy them out, you will need an additional step called ‘severing the tenancy’.

In contrast, if you are tenants in common, then the percentage you are each entitled to will vary depending on your original agreement, and other factors. You will need to establish this.

Sometimes establishing the co-owners’ respective shares is relatively straightforward. There may be a declaration of trust setting this out, either in a separate deed of trust or in a declaration in the transfer you completed when you bought the property. Unfortunately, sometimes the split is not clear or you and your co-owner may disagree over the division. Asking your solicitor to look at your title documents and consider this early on can clarify matters, giving you a solid basis for negotiations.

Get a valuation of the share you are buying

Once you know the proportion of beneficial ownership you are buying, you need to agree a price.

Sometimes there will be a trust deed which sets out the process you should follow and the basis of valuation. If there is not one, you must agree the basis of valuation with your other co-owners. Your approach may depend on several factors, such as the amicability of your co-owners and the value of the property. A possible starting point could be to appoint three or four estate agents and agree a median value. Once you have established the property’s market value, you will need to work out how much net equity will remain after applicable costs and redemption of any mortgage. Then, you multiply the net equity by the share you are buying.

For example, take a property with a market value of £800,000, transaction costs of £5,000 and an outstanding mortgage of £395,000. Your net equity will be £400,000. So, if you are buying out a co-owner with a 50 per cent share, your starting point might be £200,000.

Valuations can be complex, so always take independent advice.

Consider finance and any mortgages

If you have a mortgage on your property, discuss your plans with your lender early on. You will need their consent to the transfer, and they will need to release the outgoing co-owner from the mortgage agreement.

If you can afford it, you could simply pay the mortgage off. If this is not possible, the position is a little more complicated. Your lender might agree to release the outgoing co-owner and accept you, and any remaining co-owners, as continuing to be responsible for the debt. Alternatively, if there is sufficient equity in the property, you could remortgage, pay off your existing mortgage and use the surplus to fund the purchase of the share. There are various possibilities and considerations, and it is a good idea to take independent financial advice.

Your lender will require you to use a solicitor, and dealing with a mortgage will inevitably complicate the transfer. So, remember to plan for the additional time and cost including any mortgage redemption fee.

Consider your tax position

You should consider the tax implications of buying out your co-owner. If the value of the share you are buying is more than the stamp duty land tax (SDLT) threshold, then you may have to pay SDLT. The amount will depend on the price you pay and any other consideration, such as assuming responsibility for any outstanding mortgage. There are certain exemptions which may apply, for example, where the transfer is part of an agreement or court order because you are getting divorced or dissolving a civil partnership. Your solicitor can advise you on this.

Ensure compliance with all the legal formalities

You, or your solicitor, must ensure the legal documentation correctly reflects your agreement. Typically, this involves registering a transfer of the legal title, and dealing with any charge, at the Land Registry. This may mean adding or removing a co-owner in the register of title. However, even if it is just removing a former co-owner, you will still need a transfer from both of you to you alone. This is essential for the changes to take effect legally.

Although the Land Registry does not record changes in beneficial ownership, it may enter a restriction in the register reflecting a beneficial interest in the property. Your solicitor will ensure the correct restriction is entered, or the existing restriction removed if you are becoming the sole legal and beneficial owner. This will ensure you can deal freely with your property in the future and avoid problems when you come to sell.

How we can help

Our solicitors will ensure your transfer of equity is completed as quickly and efficiently as possible. Ending a co-ownership relationship can also be sensitive, even where the agreement is amicable.

At Sills & Betteridge, we will always pay close attention to your individual circumstances, and, where appropriate, suggest ways to improve things. For example, if you are adding in a new co-owner, as well as formalising the transfer and making clear the shares you both own, we may suggest ways of clarifying how any future buyouts should work.

For further information, please contact Rebecca Handford in the residential property team on 01529 712233 or email RHandford@sillslegal.co.uk.  Sills & Betteridge has offices in Lincolnshire, Yorkshire & the East Midlands