With the decision to divorce comes a myriad of financial implications that need to be addressed prior to its finalisation. During the early stages of the separation, options regarding the house should be prioritised. It is arguably one of the most considerable investments a couple would have made during the marriage.
Several factors should enter the discussions when it comes to making the right choices. Among them are the legal and financial ramifications of your joint ownership of a property before the divorce and how things will work afterwards.
Dividing the home
There are four main choices a separating couple can make related to their jointly-owned property:
The first option is to sell the house, pay off the mortgage and split the proceeds of the sale between the ex-spouses. Thereafter, each party can buy a property or rent a home, depending on their preference.
The second option is for one ex-spouse to buy the other out of their share, thereby allowing them to remain in the home. The third is the choice to retain joint ownership of the property for the foreseeable future.
This is often a choice exercised by couples with children, who want to maintain stability until they have finished school. After that, the ex-spouses can decide what they want to do with the home.
Finally, one partner can transfer their share of the house or a portion thereof to the other as part of the financial settlement. If the transfer is not the partner’s full share, they are entitled to receive a percentage of the home’s sale price once the other partner sells it.
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How to make the choice
The aspects of determining which of the choices above to exercise are manifold. For example, there may be tax implications for each partner that they should be aware of.
According to new rules that came into force in April 2020, the partner leaving the home has nine months to figure out how to address their ownership stake in the house before capital gains tax of 28% applies to a sale.
In the interests of continuity for the sake of their children, a couple should carefully evaluate these options before settling on one that will suit all parties. The emotional well-being of the children should be foremost in all decisions made at this time.
The law in England and Wales
There are additional options for residents of England and Wales. These include a Mesher order. This is a court order that can delay the sale of the house until a specific triggering event, such as the completion of formal schooling by the youngest child. The proceeds are then split between the former spouses.
A Martin order defers the house’s sale while giving one ex-spouse the right to live in the house until they die or remarry. Again, proceeds are divided upon the sale of the home.
What about the mortgage?
Most couples elect to find a way to remove one of their names from the mortgage, depending on their financial circumstances. There are several advantages to doing so:
- The ex-spouse whose name is removed can access better financing options to take out a mortgage to buy another home.
- This action also severs each ex-spouse’s credit files, which are tied together while they are married or have a joint debt, such as a mortgage.