Dealing with real estate issues in a divorce or dissolution of a civil partnership can be legally intricate. Misunderstanding how assets are categorised, failing to value them correctly, or overlooking tax consequences can lead to an unfair settlement and long-term financial harm. Problems can be further complicated where other family members are involved, such as an elderly parent in a granny annex, or where property is owned via a company.
‘Among some of the most challenging aspects is deciding what is to happen to property, such as the family home and other valuable assets that have been built up or acquired during your marriage or civil partnership,’ says Debr Taylor from Richard Reed Solicitors, ‘In order to avoid lengthy court proceedings, it is best to understand at the outset how to avoid the common property problems which can arise during divorce negotiations.’
Our family law team at Richard Reed are experts in this field, and below we take a quick look at the key issues that you need to consider.
Understanding matrimonial and non-matrimonial property
Before looking at the common problems, it is important to understand the difference between matrimonial and non-matrimonial property.
Matrimonial property includes all assets accumulated during the marriage, such as:
- the family home (regardless of whose name is on the title);
- joint savings, pensions, and investments, such as a buy-to-let or a holiday home; or
- businesses or companies built up during the marriage, which could own commercial or residential property.
Non-matrimonial property generally refers to assets acquired before the marriage, or after separation. Examples include:
- a home owned prior to the marriage;
- inherited wealth, such as the home of a deceased parent; or
- post-separation income or investments, such as a buy-to-let.
Non-matrimonial assets can be ‘mingled’ with matrimonial property, meaning that they are treated within the matrimonial pot. For example, if one spouse’s inheritance is used to buy or improve the family home, it may lose its separate character and mean it is treated as a matrimonial asset. Similarly, if the matrimonial assets are insufficient to meet both parties’ needs, then non-matrimonial property will be considered to achieve a fair outcome.
When it comes to negotiating the financial settlement, the starting point is an equal division of matrimonial assets. However, many factors, such as the housing needs of any children of the family and any ill health of a spouse will also be taken into account. These factors often mean that there is a divergence from a 50/50 division.
What happens to the family home?
The family home is often the most valuable and significant asset in a divorce, and it may be difficult to agree how it is dealt with as it is often an asset that has a lot of emotional ties. Both spouses may wish to remain in the home, or one spouse may wish to remain but is unable to raise sufficient monies to buy out the other spouse’s interest.
How it is divided depends on a number of factors, including:
- the age of each party and duration of the marriage;
- any physical or mental disabilities; and
- the housing needs of any dependent children.
Where there are dependent children, the court’s first consideration is their welfare. This typically means that the parent the children reside with will receive a larger interest in the family home. This may mean a larger portion of any equity in the family home if it is to be sold, or that the spouse who resides with the children is able to buy out their spouse’s interest in the home at a lower rate. If they are not financially able to do that but wish to stay in the family home, they may seek a postponement of sale of the house until the children are grown up (known as a ‘Mesher order’).
It is important to note that the court will consider the above factors, even in a situation where one spouse owns the property in their sole name.
It is also worth considering at an early stage if mortgage approval will be required, or a new mortgage application needed. For example, if you already have a mortgage on the family home that had been in joint names, this will either need to be repaid, or the mortgage company will need to consent to an agreement to transfer the property to just one spouse’s name. If the mortgage is to be repaid, typically this is done by releasing monies from another asset to raise the funds to repay, or, by taking out a new mortgage in just one spouses name.
Other real estate: second homes, granny annexes, and business premises
While the family home is the focal point, many couples also own additional properties, whether that is a holiday home, investment property, or business premises.
Second homes and holiday properties
Second homes and holiday homes are typically treated as matrimonial property if purchased during the marriage or funded by joint income. Their fate depends on the couple’s needs and financial position. Often, these properties are sold, with proceeds shared or offset against other assets.
If one party has a strong emotional attachment or regularly uses a property, it is sometimes possible to negotiate a trade-off. Typically, this means accepting a smaller share of assets elsewhere in order to keep the holiday home.
If the second home is overseas, then it is best to try and reach an agreement as to how it will be handled. If agreement cannot be reached, then our courts can consider the asset and its value in any order, but enforcement of that order outside of the jurisdiction is complex and likely to be time consuming.
Granny annexes and extended family arrangements
Where a property includes a self-contained annex or accommodation for elderly relatives, additional sensitivities arise. The court will assess both parties’ housing needs and any dependencies of elderly or vulnerable family members. If relatives have contributed to the purchase or a refurbishment, the court may need to consider whether they have a beneficial and financial interest even if they do not hold legal title. These cases often require expert evidence, including property valuations if agreement cannot be reached. Careful consideration of the property title is also required to see if any rights are registered in favour of the elderly relatives.
Investment properties and rental portfolios
The court treats buy-to-let properties and investment portfolios as income-producing assets, and they are usually included within the matrimonial pot. The valuation will typically be based on market value minus any mortgage and tax liabilities that fall due on sale.
Depending on needs, one spouse may retain the rental property to generate income, while the other spouse receives cash assets to balance the settlement. This is known as ‘offsetting’.
Business premises and company assets
Where one or both spouses own business premises or are directors/shareholders, the situation can be complex. The business itself is often the main income source for the family, so courts will be cautious about making orders that could undermine its viability.
Valuing a business requires specialist input from an accountant. We deal with several accounting experts who we can instruct on your behalf to ensure you have the assessment for your business. A valuation will consider the business resources, profitability and a realistic goodwill figure.
Upon receipt of the valuation, we will be able to advise you on the best approach under your circumstances. This may involve offsetting against different matrimonial assets, transferring shares or making structured payments.
Failing to take account of tax implications
Failing to take account of tax arising from any property transaction can be a costly oversight, and typically the following taxes need to be considered:
Capital Gains Tax (CGT)
If you are separated, you can transfer assets between spouses free of CGT until the end of the third tax year after the tax year in which you separated, i.e. on or before 5 April of the third tax year. CGT is particularly relevant where one spouse retains an investment property or business interest. Failing to plan properly can erode the settlement value by thousands of pounds.
Stamp Duty Land Tax (SDLT)
There are several issues that can arise which may have an SDLT impact. Typically, SDLT does not apply when spouses transfer property between themselves as part of a divorce settlement.
If you buy a new home before your divorce is finalised (assuming you still own or jointly own the former matrimonial home) it will be treated at the time of purchase as a second home and the SDLT surcharge will apply. If, however, you reach a settlement, or obtain an order from the court, and within three years of buying your new home, sell or transfer your interest in the former matrimonial home you can apply for a refund of the surcharge SDLT you paid. SDLT is a complex tax, with many exemptions and variations. It is therefore important to take advice on your individual circumstances.
Income tax and future earnings
Shares, investment income, and business profits also carry potential income tax implications which need to be borne in mind when entering a settlement agreement, as some could reduce the income you are perhaps expecting. Any entitlement to marriage allowance will also come to an end.
Pension sharing and lifetime allowances
Pensions can often be significant marital assets, and a SIPP or SSAS may include property, yet many couples overlook their tax complexity. Pension sharing orders transfer a percentage of one spouse’s pension to the other, but factors such as lifetime allowance limits, tax on withdrawals, and scheme rules can all affect true value.
We will advise you if independent financial, accounting and actuary advice is required to consider your potential tax implications.
How we can help
Our experienced family law team will provide you with clear legal guidance at the outset. We guide clients through every stage of the divorce process, from negotiation to settlement, ensuring your financial interests and those of your family are protected.
If you are facing divorce or separation and need advice on dividing property, contact our Family Law Department today to arrange a confidential consultation on 0191 567 0465 or email [email protected].
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.
