Divorcing when you jointly own buy to let properties

by Readers Question

7:38 AM, 14th July 2014
About 4 years ago

Divorcing when you jointly own buy to let properties

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Divorcing when you jointly own buy to let properties

My husband and I are about to split up. We own a portfolio of buy-to let properties, with all of the houses in joint names. Divorcing when you jointly own buy to let properties

I am looking for any advice regarding the pros and cons of divorce.

My initial questions are:

  1. If we divorce, do we have to split the assets there and then, or can they stay jointly owned until we maybe decide to divide them later and/or sell them?
  2. Should we put them in a company instead?
  3. If we had to split them and put half solely in my name and half solely in his, would this cost a fortune in fees? ( I remember doing this once before – a change of title – years ago, and it cost £400 just for one property)
  4. As he is going to be soon moving out of the family home and into one of our BTL houses, will this mean that upon sale of the BTL house we will get a £40,000 tax exemption, plus the last 3 years increase in value being tax exempt?
  5. If this is the case, and we sold it after a year or two, could he, for example, move into another BTL house for e.g. 18 months and then do the same thing again? Or is this classed as tax avoidance? Would there be a better way of doing things?
  6. Do we have to be divorced to do all of this – I’m thinking we do, and that separation would not be enough for the Inland Revenue?
  7. The split is going to cost us enough anyway, what with now having to run two houses, so I’m just looking for ways to offset these costs in whatever legal ways we can.

I also appreciate that this is quite expert advice but the only time we went to a tax accountant before we paid over £3,000 for what turned out to be useless advice, so I’m trying to use this site as a first port of call, to maybe pick up some ideas of the best way forward financially.

Thanks in advance – any comments are welcome.

Linda



Comments

Mark Alexander

8:21 AM, 14th July 2014
About 4 years ago

Hi Linda

I have been through this and it is painfully expensive. Make sure you get quality advice and if at all possible get a fixed fee quote and use the collaborative law process.

Please read the following linked article >>> http://www.property118.com/divorce-advice-for-landlords/44748/

I will answer your questions in the order asked:-

Q1. If we divorce, do we have to split the assets there and then, or can they stay jointly owned until we maybe decide to divide them later and/or sell them?
A1. You do not have to get divorced immediately but if you are certain that the marriage is not reconcilable I would recommend that you do and also that the division of assets is Court ordered following the Collaborative Law process. No matter how amicable the separation is now, it will get messy, usually when one of you finds another partner or when people start telling you or your partner things about what the other has been up to.

Q2. Should we put them in a company instead?
A2. Almost certainly not. This would trigger a sale to a third party and CGT on any capital gains. Please seek professional advice.

Q3. If we had to split them and put half solely in my name and half solely in his, would this cost a fortune in fees? ( I remember doing this once before – a change of title – years ago, and it cost £400 just for one property)
A3. Yes it will cost you a small fortune in fees but it will cost you a lot more if you fall out about it. If the division of assets is Court ordered then you will have to pay fees for conveyancing and fees to your mortgage lenders. It is not a given that your mortgage lenders will agree to the Court orders and may even call in the loans. Again you need to seek professional advice.

Q4. As he is going to be soon moving out of the family home and into one of our BTL houses, will this mean that upon sale of the BTL house we will get a £40,000 tax exemption, plus the last 3 years increase in value being tax exempt?
A4. It is likely that if your husband moves into one of the properties with a BTL mortgage secured against it that the mortgage conditions will have been broken. There is a risk that the mortgage lender will call in that loan. Before you look into the tax situation, please take professional advice.

Q5. If this is the case, and we sold it after a year or two, could he, for example, move into another BTL house for e.g. 18 months and then do the same thing again? Or is this classed as tax avoidance? Would there be a better way of doing things?
A5. Please see A4.

Q6. Do we have to be divorced to do all of this – I’m thinking we do, and that separation would not be enough for the Inland Revenue?
A6. There are some tax advantages associated with divorce and transfers of property if they are Court ordered, e.g. Stamp Duty Land Tax is not payable on Court ordered transfers. Please see the article which I linked to at the beginning of this response.

Q7. The split is going to cost us enough anyway, what with now having to run two houses, so I’m just looking for ways to offset these costs in whatever legal ways we can.
A7. I understand that but do not under estimate the cost. It is very expensive financially, emotionally and in terms of time. Think about the fees you paid out when you purchased each of the properties in your portfolio. That's likely to be your minimum cost associated with divorce. You are going to have to involve valuers, conveyancers, tax specialists and two sets of divorce lawyers. For example, if you own 10 properties the financial cost of your divorce is likely to be upwards of £5,000 each when you factor in all professional costs and disbursements. This assumes that the properties are of an average value and that you manage not to fall out and to agree everything amicably.

If you have any mortgages with Mortgage Express you may run into some major problems. It is highly likely that they will want their money back and if you sell one of those properties they are highly likely to enforce their rights to consolidate - see >>> http://www.property118.com/mortgage-express-right-to-consolidate/36168/ - The problem with this is that if you have had a strategy of remortgaging to release equity then your CGT bill could be greater than the value of your equity.

Please do not under estimate the complexity of divorce. Ideally you will have everything agreed before you get lawyers involved. As soon as each of you gets your own professional representation that is often when the problems usually begin. This is simply because your lawyers are duty bound to maximise the outcome of the division of assets in your favour and that their advice to you will be pitched accordingly. Lawyers on opposing sides will rarely agree and that's when their fees mount up. People often say that lawyers are the only guaranteed winners in a legal dispute and it's not far from the truth

My fixed fee Consultancy service may be an ideal starting point for you and/or your husband. If I act for you both then my fees will be double. I have significant personal experience in these matters and I am well placed to provide you both with guidance. You will both still need lawyers and other professional advisers at some point but my involvement at an early stage could save you both a lot of money and anguish in the longer term. Please see >>> http://www.property118.com/consultancy-mark-alexander/61522/
.

Stephen Reynolds

10:15 AM, 14th July 2014
About 4 years ago

Hi Linda, I won't comment on the detail of your request however a friend of mine recently went through a business separation and they did one of the cleverest things I have ever heard of. Essentially they divided all the assets before they knew which partner would receive which portion. This ensures that the split is fair and once the split is agreed you toss a coin, heads you get package A, tails its B. As it happened they then agreed to swap as this was geographically more convenient. Just a thought and best of luck with it all.

Mark Alexander

10:34 AM, 14th July 2014
About 4 years ago

Reply to the comment left by "Stephen RV7" at "14/07/2014 - 10:15":

Utterly brilliant!

Not always quite so easy in a divorce scenario though, especially if children are involved, and one partner earns substantially more than the other or one partner owns an owner operated business which has a value but the other partner could not run.
.

LVW4

12:05 PM, 14th July 2014
About 4 years ago

Linda, A very complicated and painful situation! When my partner and I split (we were not married) we would have loved to be able to toss a coin, but it was not feasible. Therefore, we agreed to maintain our jointly owned BTLs as tenants in common, and maintain a joint bank account solely for those properties. I don't think the mortgage providers care if you live together or not. Of course, that requires a lot of trust on both sides, and someone needs to do the work, but it's amazing how that can work when faced with huge and unnecessary costs, where the only beneficiaries are the taxman and the solicitors.

I wish you luck.

sharmela Jansari

13:37 PM, 14th July 2014
About 4 years ago

We did something similar once we decided who had which property, we then reduced the ownership to 99.99%:0.1%.

Linda Lane

15:45 PM, 16th July 2014
About 4 years ago

Many thanks to everyone for all this advice.
As many of our mortgages are with Mortgage Express it would be financial suicide for us to divorce if they could then call in the loans, as we have a very good monthly income at the moment, because of the low interest rates and the house values haven't recovered to their peak value, I think.
So I believe we have to go along the route suggested by Lou Valdini and keep as much the same as possible for the time being.
In terms of when we come to sell, I do believe the Mortgage Express advisor we were assigned said that they would allow individual sales in the future, without immediately calling them all in, and we would only sell one if we had that agreement in writing.
Bearing this in mind, I have another question:
If the family home is put solely in my name - this could be done when we remortgage in about 6 months' time - I'm wondering if it still might be possible to get the tax exemption on the BTL house lived in by my husband. Would the mortgage company even have to know about this? If we sell the house and tell the Inland Revenue that it was his main residence (and can prove this via utility bills etc), would the mortgage company ever need to know? Does anyone know if they could find this out?

sharmela Jansari

16:40 PM, 16th July 2014
About 4 years ago

I sent this article to a friend a few months back, Im sorry but I am unable to find the source, hope it is of some assistance:

When a marriage or civil partnership breaks down the last thing on your mind is the effect that the break-up might have on your relationship with the tax man. The tax implications of separation can bring its own problems to an already frustrating set of economic circumstances if not considered from the outset.
Treatment of tax to be paid on divorce
When a married couple separate, the first step is to establish what matrimonial property they have acquired either separately or jointly during the marriage. Matrimonial property is all property acquired during the marriage, except any gifts or inheritance which have remained in their original form. The value of the family home bought before the marriage is also included in this calculation. From any matrimonial assets are deducted any liabilities which have accrued during the marriage to establish the net value of the matrimonial property available to divide.
Although tax is a liability, the generally held view is that tax which hasn't yet been assessed or billed will not be deductible from the overall value of matrimonial property. The treatment of a potential tax bill was considered in a family law case in 2004 in which a speculative or hypothetical tax bill was not viewed as something which should be deducted from the overall value of matrimonial property.
However, the liability of a large tax bill will undoubtedly have a knock-on effect to the tax-payer's resources and it is at that stage that a payment of tax may be accounted for as part of the three stage exercise of considering the matrimonial property: (1) establishing the matrimonial property; (2) deciding how the matrimonial property should be divided; and (3) considering whether the amount calculated to divide the matrimonial property is reasonable having regard to the resources of both parties. This includes their financial resources now and the resources they might have in the future.
More recent family law cases which have considered the treatment of tax highlight that the Court will look at the particular tax circumstances in mind. In other words, each case will be decided depending on the circumstances.
Tax paid on transferring assets between separating spouses
Capital Gains Tax ("CGT") is a tax which arises when you make a profit or gain on an asset which you sell or give away. You have an annual tax-free allowance for CGT which will soon increase from £10,900 to £11,000. In other words if your overall gains or profits from the sale of an asset for the tax year goes beyond this tax-free allowance, you will pay CGT on the excess at the applicable rate. At present CGT is paid at a rate of 18% on any gains made by a basic-rate taxpayer; and 28% for a higher or top-rate taxpayer.
Where you are married, transfers of property between you and your spouse or civil partner is on a "no gain, no loss" basis for CGT purposes, i.e. CGT does not apply.
Before an agreement separating out your assets has been reached, it is sensible to bear in mind what tax charges will arise due to living apart and prior to divorce. The CGT exemption for married couples will only apply during the tax year in which spouses separate rather than continuing until they are actually divorced.
To benefit from relief from CGT on transfers of property between spouses, the court order or agreement that the property should be transferred from one spouse to the other must be made before the end of the tax year of separation. It is also not enough for there to simply be an agreement that a property is to be transferred from one spouse to the other, the transfer will need to be completed within the same tax-year period in order to avoid potential adverse tax implications.
During the period between a couple separating and finally getting divorced assets can be transferred from one spouse to the other at base cost. Afterwards, the exemption will no longer apply although spouses may still be treated as "connected persons" for CGT purposes. This means any asset transfer will be treated as having taken place at market value by HMRC.
Tax paid on transfer or sale of the family home
The tax consequences of separation differ when it comes to the family home. Where the family home is your only or main residence, throughout your period of ownership you will be entitled to a full relief from CGT on any gain. This is known as Principal Private Residence ("PPR") relief. For separating couples the PPR of both spouses is likely to be the same property when they separate. However, this might change where one spouse moves out of the family home and buys a new property.
The relief to CGT will continue to apply for an allowed period of absence from the property and so long as another property has not become or been elected as your PPR.
It is important to keep an eye on the period of absence from the PPR. The period of PPR relief will apply for three years since occupation providing certain conditions have been satisfied . This period of relief is set to be shortened to eighteen months with effect from 6 April 2014.
This period of relief can be extended by HMRC where the interest in the house is eventually transferred to a spouse who has continued to occupy the primary residence as part of an agreement on how the matrimonial assets should be divided.
Separate from CGT, there is an exemption on Stamp Duty Land Tax ("SDLT") on transfers of any property agreed by parties in contemplation of or in connection with divorce. It is therefore not expected that SDLT will be payable where a property is to be transferred between spouses. The SDLT exemption could also apply to transfers to children in contemplation of divorce where a decision has been made to retain a property for the future good of the family.
Tax considerations for family businesses on divorce
There are also tax considerations where spouses hold an interest in a family business. The tax exemption for transfers between spouses in the tax year of separation also applies to assets held within a family partnership. Where the Agreement or order by the court transferring the partnership asset or indeed company shares is dated after the tax year of separation, it may be possible to defer the tax to be paid by applying for "hold-over relief" if certain qualifying criteria are met.
If a partnership operates between a husband and wife who separate, it is not unusual that the partnership will be dissolved or will continue in the name of one spouse only, with a new partner. This could lead to tax issues depending on how the underlying partnership assets are held. Where funds are to be withdrawn from a capital account, income tax will be payable on the profits taxable in the year of cessation of the partnership.
Tax exemptions on death for separating spouses
As well as losing the exemption for CGT on separation, spouses will also lose their exemption on inheritance tax charges which would not apply when they were married. The inheritance tax exemption will only apply up to the date of divorce. Transfers between spouses will continue to be exempt from a charge to inheritance tax where the transfers are not intended to be made in return for something or where the transfer is made for maintenance of the family.
Income tax and tax credits for separating couples
Income tax does not automatically cause problems for separating couples as individuals are taxed on their own income. Separating spouses have a duty to support one another financially by paying aliment until they are divorced. Sometimes this payment will continue after divorce where it is ordered by the court or as part of an agreement. The spouse making the payment of aliment from income will be taxed on their gross income from the initial payment received. Maintenance payments received are not subject to income tax by the spouse receiving the payment.
When it comes to tax credits for children, these should be claimed by the spouse with whom the children live. This can be unclear where there is a shared care arrangement between parents. However as the test for tax credits is now means tested, it is expected that it is the spouse who would qualify for the credits that would claim where the children are living with each parent on a shared basis.
To avoid a situation where the tax issues on separation or divorce become taxing, or are overlooked, it is worthwhile seeking sound advice from a family law solicitor who can direct you to the appropriate tax expert. Where there is a family business some careful consideration should be given as to how the business will be maintained in the future and plans made accordingly bearing in mind the tax consequences.

Mark Alexander

16:50 PM, 16th July 2014
About 4 years ago

Reply to the comment left by "sharmela Jansari" at "16/07/2014 - 16:40":

This is good advice, hence I always suggest to people that it could be financial suicide to apply for a decree absolutely before the transfers of assets have been Court ordered and subsequently completed.

Transfer of assets between spouses are CGT exempt and Court ordered transfers do not attract SDLT. After the decree absolute is grated then you might as well be complete strangers and you will be taxed accordingly.
.

Linda Lane

14:11 PM, 17th July 2014
About 4 years ago

I've had another thought (always trying to dream up ways of saving money): If I moved at some point to another of our BTL houses (we've got a very nice one I've always liked) and sold the family home, then nominated the BTL as 'our' family home (since I've decided we can't divorce) - while my husband lives in the other BTL - would this be financially advantageous, because of tax exemptions? If it wasn't significantly so, then I'd probably just downsize to another house of my choosing (not one of our BTLs) when the dust has settled as it will probably be a good idea to have a fresh start somewhere new (I'm the innocent party in all this by the way).
Things are very emotional at the moment and I'm in a permanent state of shock, but it helps if I can plan out the future in a practical way. I won't need such a big house pretty soon as I'm expecting my 15- year old daughter to go to university in three years' time and my 16-year old son plans on staying with me forever...

Mark Alexander

14:32 PM, 17th July 2014
About 4 years ago

Reply to the comment left by "Linda Lane" at "17/07/2014 - 14:11":

Hi Linda

If you sell the family home there will be no CGT issues to worry about. If the mortgage on that property is portable you may also be able to port it over to the BTL property and pay off the BTL mortgage.

If your BTL becomes your principal private residence then you will begin to accrue PPR relief which will reduce your CGT bill when you eventually sell it.

Your BTL mortgage lender is unlikely to allow you to live in a property which has a BTL mortgage secured on it. That's if they find out - and of course they often do, even though several people chance their arm. If you're one of the unlucky ones who gets caught out by this you will regret it so please do whatever you can to mitigate this risk. You think you are under pressure now - just imagine if you were given 28 days to repay your mortgage due to being in breach of contract!!!

Why have you decided you can't divorce? Are you certain that you understand the implications of this, e.g. if your ex dies before you do, becomes insolvent, goes into long term care etc.?

By the way, thank you for posting your Readers Question. Another person in a similar situation to you has read this thread and has purchased my six month consultancy package for a fixed fee of £995 🙂
.

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