Alternatives to Sale and
Rent Back Schemes
Transferring Ownership via Deed of Gift
If you wish to keep your property “in the family”, and if you would prefer to stay there and pay rent to its new owners, you might choose to give it to a relative as a “gift” and then rent it back.
Unless the intended recipient is a spouse or a civil partner, and/or unless your estate is worth less than the tax-free threshold of £325,000, giving a gift of this kind will likely incur an Inheritance Tax (IHT) charge.
However, IHT will not be charged if you live for more than seven years after giving the gift.
If you live for between 6 and 7 years after the Deed of Gift, tax will be payable at 8%. Between 5 and 6 years, it rises to 16%. Between 4 and 5 years it’s 24% and between 3 and 4 years it’s 32%. If you pass away within 3 years of the deed of gift, IHT is payable at 40%.
This system is known as “taper relief”.
Usually, IHT is payable by the estate of the deceased. However, if the combined value of the gifts given within the seven years preceding the donor’s was to exceed £325,000, IHT would be charged to the recipients.
The approach of transferring property to a family member via Deed of Gift - then renting from them - may also cause issues when it comes to your mortgage. This is because, if you still have a loan of this kind in place, it will usually need to be repaid before a new owner can take charge.
There are some circumstances in which it may be possible for you to transfer your mortgage into another person’s name. However, this depends on the type of loan you have, as many mortgage products do not allow this.
Some, on the other hand, may be compatible with this process. The steps involved in removing your name from the property’s mortgage and adding someone else’s can be achieved via Transfer of Equity.
The term “Transfer of Equity” refers to the act of legally adding names to - or removing them from - a property’s title deed on the Land Registry. Any action of this kind must be approved by the mortgage lender. You may be required to remortgage as part of this transfer, but not always.
Before your chosen family member can take on the mortgage repayments for your property, the lender will need to run a background check to ensure that this new individual has the financial means to do so.
These checks will most likely be the same as the ones you underwent when first applying for the loan.
In order to begin this process, it is likely that you will need to be up to date with your mortgage payments.
It is unlikely that you will be permitted to arrange an Equity Transfer if you are currently in arrears, so this approach may not be the answer for you if you are trying to move from homeownership to renting in order to clear your debts.