Divorce and Property!
Divorce and jointly owned property portfolios
If a large portfolio of investment properties are owned by either one or both spouses, it can prove difficult to reach agreement on how best to distribute the marital assets during the divorce proceedings.
Even if action is taken promptly to swap ownership in a manner that avoids immediate tax liabilities, as explained in last weeks blog, there are plenty of other tax and financial factors to take into consideration.
It is unlikely that simply dividing a property by reference to present market value will ultimately give a fair result; consideration should be given to what capital gains tax liabilities would arise if the properties were to be sold now (some properties will have higher gains than others), what are the outstanding mortgages that would have to be repaid, what interest rates are payable and what rental yields will the properties generate are just some of the relevant questions that should be asked. The new rules denying higher rate tax relief on borrowing costs also could provide an extra degree of unwelcome complexity, particularly if one spouse is a higher rate taxpayer and the other is not.
Main residence relief
Consideration should also be given to entitlement to main residence relief. An important point here is a married couple must have the same main residence, at least until they have permanently separated. Furthermore, a property only continues to be a person’s tax exempt property whilst it continues to be their home. The individual who moves out of the marital home therefore potentially could be at a disadvantage for a while. There is some help in the legislation though, which allows in certain circumstances a deemed period of residence to apply, as long as the no longer resident spouse transfers their interest in the former marital home to the resident spouse. A claim does have to be made for this deemed period of residence to apply.
Other potential tax relief
Furthermore, just because the window of opportunity is missed for exchanging interests in property without tax consequence, it does not always mean that an exchange in ownership will generate a CGT liability; this is because another relief can apply if joint owners of two properties exchange their interests with one another such that both properties end up being solely owned by one person – as long as neither property was or will be the tax exempt residence of either party.
There is also some help where stamp duty land tax is concerned; transfers that are made pursuant to a court order or as part of a divorce settlement should normally be exempt from SDLT charges.
It is possible that the reorganisation of property ownership might actually present an opportunity to restructure one or both party’s affairs in a more tax efficient manner; would it be possible or beneficial to now involve a limited company?
Clearly there are a number of nuances that could come into play, and so failing to obtain appropriate advice could prove costly. Tom Foster specialises in all aspects of property taxes, and has been appointed as a joint expert instructed to provide impartial advice to divorcing couples on numerous occasions.
Please contact our Tax Director Tom Foster should you have any queries on this subject!