Be careful when adding/removing a name from deeds
Property owners often wonder about adding or removing names from the property deeds. In the past it was advantageous for parents to add their children to ownership, but rules have changed and there is now a tax consequence in adding children.
A person must be 18 years old, or older, to own land in Bermuda and so any reference in this column to a child, is to a child 18 or older.
Spouses may not transfer property between themselves without tax consequences, either.
In the above cases, stamp duty is the tax consequence. Stamp duty is calculated on the open market value of the property interest transferred, whether or not money actually changes hands. So, for example, if a home is valued at $1 million and a half share is being transferred for no consideration, stamp duty would be $14,000.
Presently open market values are depressed, with consequent stamp duty depression and so now might be a good time to add or remove names from deeds.
If a divorce order is properly worded, in transferring property from one divorcing spouse to the other, stamp duty is limited to $200, rather than being based on the open market value being transferred.
After death, a property designated as a “Primary Homestead” can be transferred to heirs without tax consequences. A qualifying property can be registered as a Primary Homestead either before, or after, the owner's death.
A further disadvantage in putting the names of children onto deeds is loss of the possible first time buyer's stamp duty exemption. If a Bermudian buys a home valued at $750,000 or less (there are plenty of such properties in the present market) and has not ever purchased a property before, there is a stamp duty exemption worth up to $24,000. However, if that purchaser has been added to a parent's deed, then the exemption shall not apply, because of previous property ownership.
If, despite the tax disadvantages, a parent wishes to add a child, that parent should consider carefully the other consequences of doing so. The child's signature would be required for all future transactions involving the home mortgaging, selling or renting out, for example.
Furthermore, the child could end up taking a mortgage on the home, even resulting in the bank selling the home for default. A middle-aged parent may not wish to have the inflexibility of a child on the deeds for the rest of that parent's life, which is likely to be long.
If a person is to be added to the deeds, the parties should consider how the property is to be shared between two or more owners.
The owner transferring may wish to become a life tenant, in which case he or she shall be entitled to live in the property for the rest of his or her life, but not entitled (except under very limited circumstances) to dispose of, sell, or mortgage the property. On the death of the life tenant, parties known as remaindermen become absolute owners as no-one else may inherit the property.
The property can be co-owned as joint tenants or as tenants-in-common.
For joint tenants, ownership passes by survivorship and so the longest surviving joint tenant ends up owning the whole property. No-one, other than the last surviving joint tenant, may pass their share by inheritance.
Tenants-in-common may pass their interest in property by inheritance.
If co-owners fall into dispute, statutes known as the Partition Acts may assist. The legislation gives the court power to order owning occupiers to vacate property, divide property among co-owners, or sell or transfer property.
The sure ways of avoiding substantial tax in transferring ownership of a home are through death (qualifying for Primary Homestead), or through divorce. Both are extreme!
Anyone considering adding or removing a name from a deed should consider estate planning with an attorney, so that stamp duty and other potential consequences can first be considered.
The tax free way to transfer a property to children, spouses or others is by way of inheritance of a primary homestead. Writing a will may provide better peace of mind than an immediate property transfer.
Attorney Neil Molyneux is a member of the Property Practice Group at Appleby (Bermuda) Limited. A copy of this column is available on the company's website at www.applebyglobal.com.
This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer.