Sarah Higgins, a partner in the family team at law firm Charles Russell, explains how second homes can become a liability when warring couples become embroiled in divorce proceedings, particularly if situated abroad.

Sarah Higgins, a partner in the family team at law firm Charles Russell, explains how second homes can become a liability when warring couples become embroiled in divorce proceedings, particularly if situated abroad.

A castle in the French Alps or a villa in Tuscany – many wealthy families have second or third homes abroad. These often have great emotional significance to couples when they divorce and to their children. They can also be a financial benefit or a liability which each party may be keen to offload onto the other. Second homes can also, perhaps surprisingly, form part of a “needs” argument.

When parties are sorting out their finances on divorce, they have an obligation to disclose their worldwide assets, including their properties. In reality, a spouse will of course know of the existence of a second home and the issue is normally one of valuation. If a couple cannot agree the value of a property, it will be valued (normally by one valuer jointly instructed) and the value will form part of the asset schedule for division. 

A property, however, is not necessarily just an issue of how much it is worth on a schedule of assets. It may be of emotional significance to either or both of them, as a second home is often part of a family’s history and where they have taken children for holidays. It may be that it has been brought into the marriage by one of them, in which case normally it will not form part of the assets for sharing (subject to needs). There can be an argument as to which is a second home and which is the matrimonial home, as the applicant may want to argue that the more valuable property is the matrimonial home with the aim of receiving a greater share in it. This issue is less likely to be arguable where the second home is abroad, but not impossible.

The “needs” argument

If one of the parties brought most of the wealth into the marriage, or inherited it, then the usual yardstick of sharing assets equally may well be displaced so that the applicant is limited to his or her  needs. If they are a wealthy family and have been used to having second or third homes, then a second home will form part of a needs argument. This is not just a capital issue, as second homes may be very expensive to run, not only by way of utility bills and maintenance, but because often there are staff costs too. However, it may be possible in these cases to reduce the costs which would otherwise be payable for holidays.

Second homes can be a liability. They may have been bought in a country whose economic system has collapsed; often second homes have had money lavished upon them to make them into a “dream” property. They may have been bought with a mortgage and there may be negative equity. The question is then whether to cut losses and sell, keep the property in joint names in the hope that the property market will recover, or for one party to keep the property and be responsible for the loss and for the upkeep. In the end, if the parties cannot reach an agreement about this, the court will make an order which is fair having taken into account all the circumstances. It may be unlikely for the weaker economic party, normally the wife, to have to take on the property in such circumstances as she will be less able to take the risk that the property cannot be sold.

Practicalities

There are many practical issues to be considered with second homes abroad, particularly tax. If the property has made a profit, then the parties will have to consider the liability for capital gains tax. If the parties are able to transfer the property within the tax year of separation, this should postpone liability for tax in this country. It is essential that local advice is taken in the country in which the property is situated, both with regard to tax liability on any gain but also relating to the costs of transfer or sale. Often costs of sale are higher in other countries than here, and consideration needs to be given as to who will bear those costs. Technical issues in relation to the transfer also need to be thought about, so that advice is taken abroad before the parties are committed by way of a court order as to how the transfer or sale for example will be enforced if one party later defaults.

Some couples hope to continue to share a second home after divorce. Careful thought needs to be given to this and how any agreement will be enforced if they fail to agree later. It may seem like an ideal solution at the time, but couples need to consider how they will feel when they see their former spouse’s new partner’s hairbrush in their bedroom.