Value of a charge on a house after divorce.

MeOnMonSavExp · 12 January 2013 at 7:41PM

So this could be about Divorce or about House prices ... but in the end I decided to post it here, because it really is a question about the value of an asset - a charge on a property.

Here's the scenario:
After a divorce a husband has a charge on a property (25% of the equity after the absolute value of the mortgage at the time of divorce has been deducted). Here's the sum:
Gross value of the property: £500K
Minus mortgage (£145K) = £355K
x 25% = £88.75K

Of course the terms of a charge after a divorce mean that the husband will not get his hands on the money for a period of time - in this case 13 years. And even then potentially only after forcing a sale. Indeed, if circumstances deteriorated for the ex-wife, the husband may never see all the share.

On the plus side if house prices increase the husband's share of the gross value will also, because the original mortgage value will always stay the same. So if house prices doubled the sum would be (£1m - £145) x 25% = £213.75K. But the downside there would be that the increase (from the original £88K) would be subject to CGT.

So, assuming that you would might want to release this asset so that you could put the money into property of your own rather than in someone else's, what would you take for it?

System · 12 January 2013 at 7:59PM

Are you sure that it would attract CGT as it is part of the divorce settlement.

ETA if this is part of a Mesher order then no CGT would apply

MeOnMonSavExp · 12 January 2013 at 8:08PM

Thanks !!!!!!. Not at the point of divorce. But after 13 years the difference between the original valuation of £88K and whatever the new valuation was, would attract CGT yes.

grey_gym_sock · 12 January 2013 at 8:09PM

comparing this to owning 25% of a property in a standard way, this situation presumably is better in that there's no obligation to pay 25% of mortgage interest or property maintenance costs, but is worse in that there's no ability to let the property and receive 25% of any rent (or to live there). overall, that's going to be worse. it's like losing a small percentage of the theoretical £88.75k each year, for 13 years.

you could estimate figures for (25% of) mortgage interest, rental value, and maintenance, to get a figure of how much is lost per year. then if e.g. 2% is lost per year, that suggests a discount of about 25% to allow for 13 years.

that's a possible way to get a starting figure. it doesn't allow for risks - e.g. that the mortgage interest might not be paid - which would suggest accepting a bigger discount to avoids the risks.

it also depends on how keen both parties are to end this arrangement, and what cash they can access now. which could lead to a very different figure.

MeOnMonSavExp · 12 January 2013 at 8:24PM

!!!!!! wrote: »

ETA if this is part of a Mesher order then no CGT would apply

I'm not sure that's wholly true: This is from www.prolegal.co.uk re Meshers.
"There could well be tax consequences, and careful advice would need to be taken as to possible Capital Gains and Inheritance Tax implications. The non occupying spouse should particularly be alive to the possibility of a Capital Gains Tax charge when finally receiving their payment, if they have purchased a new principal private residence."

MeOnMonSavExp · 13 January 2013 at 2:35PM

grey_gym_sock wrote: »

that's a possible way to get a starting figure. it doesn't allow for risks - e.g. that the mortgage interest might not be paid - which would suggest accepting a bigger discount to avoids the risks.

it also depends on how keen both parties are to end this arrangement, and what cash they can access now. which could lead to a very different figure.

Thanks GGS. The terms of the settlement provide some comfort in that the ex-wife is obliged to 'make her best efforts' to avoid endangering the value of the ex-husband's share.

There are other risks of course, as suggested in the original post, but as you say the real issue is what cash can be accessed now by each party. In this case, the ex-husband has substantial income but, for the time being, very little capital and no house of his own.

Anyone else care to take a punt? I'm really interested in how you all see it.

atush · 13 January 2013 at 5:45PM

I see it as depending on how the wife was left in her finances/work/ability to work. For instance with 3 children under 5 she might not be able to afford to work as the cost of child care would be too high.

Does she work? Does she have any pension? Does she have access to capital? Does she earn enough to borrow any more to enlarge the mtg?

If you (or whoever) wants to be free and clear, it might be worth your while to discount the share by up to 50% to enable her to borrow the extra from a bank/friends/family to buy you out. As she'd be taking on all the investment risk associated with the property.

Value of a charge on a house after divorce.

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