Divorcing when you have modest marital assets can be complicated, but when you have investment properties, this can be multiplied many times over. Essentially, the more properties you have, the more complex it can get. So what are the important things to know if you have a property portfolio and are getting divorced? Read on for more information.
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The first thing to do is to think about engaging experienced professionals. These may range from a divorce solicitor and financial adviser to a property tax specialist, surveyor, or mortgage advisor. You should then consider answers to all the key questions they are likely to ask, such as:
- How much total mortgage debt and equity are there in your property portfolio?
- Do you divide the properties between you or sell them?
- If you sell them, or buy out your ex, will you be liable for a significant amount of tax?
- How do you decide who gets what?
- What impact will the divorce have on your Buy to Let mortgages?
As a general rule, all assets within a marriage are legally considered to be jointly owned, regardless whose name is on the property title deeds. This means that any property you own will be deemed marital assets and form part of the pot for division as part of the financial settlement. There are some exceptions to this rule, buy typically, investment properties are likely to be shared, or, the other party will be creatively compensated for an equivalent value if one party retains the properties.
What should I consider when untangling our buy-to-let property investments on divorce?
There are four main areas of concern surrounding buy-to-let investments, and it might be helpful to think about the following questions before you seek professional assistance:
When was the property purchased?
Was it before the marriage or afterwards? If it was before, you should consider how the use of the property has changed following the marriage.
Who put work into the property?
The answer to this question shows the value that each party added to the property. When this is clear, it will be easier to divide the asset amount equitably.
Does either party wish to retain the property?
Usually a buy-to-let investment requires the owner(s) of the property to perform the duties of the landlord. These may be minimal, such as securing a tenant every so often as demand requires, but they may also be quite extensive. If you are divorcing, you should consider whether you or your partner want to continue performing landlord duties. The answer to this question can bring a great deal of clarity to the situation.
How much rental yield does the property deliver?
Although the rent should provide the owner(s) with a profit each month, there are also expenses to consider, such as repairs, legal fees, and taxes. Some landlords even factor in the number of days/months each property is vacant each year. The yearly profits minus expenses, and vacancies accounted for, will be a helpful way to evaluate each properties rental yield, and let you see the situation more clearly.
How are investment properties valued for the purposes of divorce?
The most common approach to valuing investment properties is for an independent estate agent or surveyor to be appointed to value each property within the portfolio. This tends to be a joint instruction by both parties. An accountant may also be helpful in valuing the overall business because they will be able to consider various factors, including the assets owned by the business, and earnings and profits. They can also report on the options available and any tax implications.
Seeking the advice of specialists to value the portfolio could also prove or disprove your ex’s claims of negative equity or head off disputes over the valuation.
Can we divide the investment properties between us if we divorce?
If the properties are mortgaged and these are in joint names, if you decide to divide them between you, you should be aware that your provider is likely to want to reassess the affordability. Providers rarely withdraw mortgages unless they have good reason, so if you can prove consistent rental income at a sustainable level, they may agree to transfer the equity share without too much trouble.
But what happens if you continue to hold the mortgages in joint names? Here, you will be financially linked with your ex until the mortgage is closed. It may, therefore, be sensible to divide the assets to protect yourself against your credit score being adversely affected by your ex-spouse’s actions.
Is a property transfer between spouses/civil partners exempt from Capital Gains Tax?
Any investment property transfers between spouses/civil partners are exempt from Capital Gains Tax (CGT) for a specific period of time. If you separate, you get a period of grace before CGT applies, and have until the end of the tax year in which you separated to benefit from the exemption. So if you separated on 6th April in a particular year, you would have 12 months. However, if you separated on 1st April, then you would only have until midnight on 5th April to transfer any assets that may attract CGT. The deadline begins from the date the division of the portfolio is agreed, not the date the property changes hands, so you should ensure you sort out who gets what as soon as possible.
Additionally, properties transferred subject to a court order are exempt from stamp duty. However, it is extremely unlikely you could transfer properties under a court order as discussed within the timescales above. Even three months would be too short a period to get a court order.
With the assistance of a tax expert and a conveyancing specialist, you would need to calculate the greater saving, stamp duty or CGT. A mediator may also help you and your partner map out a route to a fair solution. This may involve one party buying the other out so that the investment portfolio can stay intact. Or selling the properties and dividing the proceeds.
The information on this website is to be considered a guide and is therefore not legal advice. You use this information with the understanding that Wiselaw does not accept liability for any direct or indirect losses as a result of anyone relying on or acting upon the information on this website. Whilst we endeavour to provide accurate information, Wiselaw does not accept liability for any errors or omissions on this website.