21 SEP 2016
Moving on: tips and tricks for putting together a housing need case
Accepting that there is a possibility that the family home will need to be sold following a divorce, and that the family will need to move on in the most literal sense, is one of the hardest challenges that a separation can bring.
Broadly speaking, parties to a divorce can prepare for one of three difficult outcomes for how the family home will be dealt with in the event of a divorce:
Option one is often very attractive. However, it often entails trading the value of the home against other assets, so it is important for the party who will have the benefit of retaining the property to make sure that they have thought through the consequences of this.
- one party being able to afford to stay in the home without having an impact on the other party's financial claims;
- the house needing to be sold in order to release capital to purchase one or more new properties, which will then become the family home; or
- one party staying in the house initially, and selling and dividing the proceeds at a later date due to insufficient flexibility in the family finances to make selling the house immediately a viable option.
The party retaining the property will need to consider whether this will reduce the amount of liquid capital that they might otherwise receive, and whether this will result in them having little security as all their capital is locked up in the house. Also, are they effectively trading off the interest in the house against an interest in a pension? If so, the lawyers involved need to look carefully at how these are offset against each other, and how this will provide for the party keeping the property on retirement.
Regarding the second outcome, if it is likely that the house is going to be sold, there are important and practical steps that both parties should take. First, both parties should calculate the net proceeds of sale to make sure they know how much money will be released. In doing this, ensure that there is an up-to-date redemption figure for any mortgage, and that penalties payable on repayment of the mortgage have been taken into account. If redemption penalties expire in a short time-frame, consider whether it is sensible to delay a sale for a period of time to maximise the proceeds of the same.
Most properties that have been a family home will be exempt from capital gains tax as they will qualify as a principle private residence. However, if one party has purchased another property, has not been living at the home for some time, or if there is a possibility that the property might be subject to tax in another jurisdiction, both parties must take appropriate advice on whether any tax will need to be paid from the proceeds of the sale.
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Once you have a detailed calculation of the net proceeds of sale, the next step is to look at your purchasing power and check each party's mortgage capacity with the assistance of a mortgage broker, or IFA, to ensure that this is properly assessed. Only when this has been done can you start to look properly at where you might move to, and how much it will cost.
This exercise can be time-consuming, but a correctly prepared analysis of housing options pays great dividends for the time spent on it. Look first at fixed points, including current and potential schools and other things that might dictate geographical locations such as ease of travel to and from work, proximity to a station or public transport, and whether the location works for any existing or proposed childcare arrangements. Many property websites are a useful indication of the market, but cannot replace spending time viewing properties in person. Houses that look as if they tick all the boxes on paper may not in practice, and, similarly, ones that may not look promising online can often be surprising in reality.
Having completed this exercise, you can then compile a shortlist of options evidencing them with copies of the full sale particulars, including, significantly, the floor plan with an indication of the extent of the internal space and room sizes. An exercise that many find useful is preparing a map marked with fixed points (eg schools, work and other key locations for the family), and the location of the proposed properties. The next step is to then undertake the same task for the other party, including going to view houses that may be suitable to meet their needs. There is no sense in suggesting that the other party can scrape by with the bare minimum, and it is better to prepare a realistic case about the housing available to meet their needs. These properties can thereafter be marked on the same map and the particulars collated. Once this has been done, it is an invaluable resource which can be sent with settlement proposals, used in mediation, or, if there are court proceedings, form part of the evidence available to the court.
Option three usually comes into play when there is limited capital in an existing property once the mortgage has been repaid, making it insufficient to enable either party (when combined with their mortgage capacity) to purchase a new property. In this situation, it may be prudent for one party to continue living in the current home and for it to be sold in the future at a time dictated by one of a series of 'trigger events'; for example, when children finish school. There are a number of ways in which this can be put into place, but, most importantly, careful consideration needs to be applied to not only the division of the future proceeds of sale, but also to how the property will be owned in the meantime, including the tax consequences of a future sale and how the property expenses will be managed before it is sold, as well as where the other party will take up residence.
Ultimately, when faced with any of these situations, in-depth planning and thought is crucial - not only for yourself, but for the other party involved, too.