How should we split ownership of our properties?

I own an equal third share of a property in France, worth £350,000, with my two brothers. We also own an equal third share of a UK property, worth around £750,000. One brother would like to purchase the French property outright by buying our remaining shares, which all parties are happy with. He has suggested using his third share in the London property to do this.

Could he gift his share of the UK property to the other brothers? In return, they would gift him their one-third shares in the French property. What would be the legal and tax implications of such gifts?

George Coleman, partner in the residential property group at law firm Withers, says the proposal to “swap” shares in the properties is perfectly possible. If the UK property is subject to a mortgage the transfer will be complicated by the need for you to get your lender’s consent to the transfer.

The tax aspect, however, needs a bit more thought. Let’s start with the issue of stamp duty land tax (SDLT), which applies in England and Northern Ireland (Scotland and Wales have their own property transaction taxes).

HM Revenue & Customs will see you as paying a “non-cash consideration” for the acquisition of the share in the UK property. The SDLT you and your brother will have to pay will be calculated on the market value of the two-thirds share in the French property, even though this represents an underpayment.

If there is a mortgage on the London property and you are to assume responsibility for your brother’s part of the loan, then SDLT will also be due on your brother’s share of it. Note that the total amount of SDLT payable on the value of the mortgage and the French property exchange combined cannot exceed the amount otherwise payable for the market value of the additional interest acquired in the UK property. If you own an interest in another property, the acquisition may be subject to the 3 per cent additional property SDLT surcharge.

Then there’s inheritance tax to consider. Your brother will be selling his one-third share in the UK property at a slight undervalue, which is effectively a gift from your brother to the two of you. This will constitute a “potentially exempt transfer” for IHT purposes, meaning it will be exempt from IHT if your brother lives for seven years after the date of the gift. However, if your brother continues to derive benefit from the UK property, the value of the gift would remain within his taxable estate for IHT purposes.

Next, there is capital gains tax to factor in. Assuming the UK property is not your brother’s principal private residence and that its value has appreciated since the date of acquisition, then the disposal of his share will potentially generate an immediate CGT liability. The liability would be calculated by reference to the market value of your brother’s one-third share in the UK property, rather than by reference to the value of the non-cash consideration he receives.

Furthermore, the disposal of your interest in the French property will also generate an immediate CGT liability for you, calculated by reference to the extent that market value of your interest exceeds the acquisition value, even if the actual consideration paid (your brother’s share in the UK property) exceeds the market value. A credit may be claimed to reduce the amount of CGT chargeable on the French property to the extent that French tax on capital gains is also chargeable.

It is worth noting that your proposal is complicated and fact specific, and legal advice should be sought from both jurisdictions before any proposal is implemented. This answer assumes that both properties are residential (and thus VAT exempt), and that you are all UK residents. The property and tax treatment may also be completely different on the French side, so this will also need to be accounted for.

I’m terminally ill, how can I get my affairs in order?

I’m terminally ill, but my divorce isn’t settled, despite it rumbling on for years. I don’t want to die before it is finalised. How do I get my affairs in order, quickly?

Penelope Samuels, a wills and probate solicitor at SA Law, says navigating a terminal illness, at the same time as dealing with a divorce must be extremely challenging. 

You will need to speak with a family lawyer (if you haven’t already) and a wills and probate lawyer. If they are from the same firm they could work collaboratively, which could potentially help you navigate the wills and divorce process in a more time-efficient way.

If you have no will in place, and the final order for your divorce has not been issued, your ex will be treated as your spouse under the law and will inherit your estate under the rules of intestacy. Even if you do want your ex-partner to inherit your estate, for example, for the sake of your children, it is still worth putting together a will to ensure that if you have certain wishes about how the money should be used, such as for mortgage payments or education. They will be adhered to and protected by schemes such as trusts.

You should also consider that your ex-spouse would be entitled to file a claim against your estate for reasonable financial provision comparable to what they might have received in the divorce, if they do not benefit similarly from the will you’ve drawn up.

It’s really important that you get a full picture of your assets, which assets are yours, and what you would like to gift, how and to whom.

For example, this includes the assets you own in your name, the assets you own with your ex, and your pensions. If you’ve been through the financial settlement stage of your divorce, you might already have a good understanding of assets such as property, bank accounts, savings accounts, bereavement support payments under pensions, and insurance policies.

Bear in mind that any savings in joint accounts with your spouse will automatically go to them. If it’s in your name only it will be considered part of your estate, so if you’ve made a will, then it is yours to decide how you will gift it.

You’ll need to consider that property, depending on how you own it — that is, under joint tenancies or tenancies in common — will be treated differently under the law when it comes to your estate. 

If you have debts these will be liabilities against your estate, but if you are a second card holder on your spouse’s credit card, they will be their debts only.

If you are relying on treatments through a joint health insurance policy, it is crucial not to bring this to an end inadvertently during the divorce process, as finalising the divorce could have that effect.

Your will can also specify the relatives you want your children to live with, if you do not want it to be your ex. Ideally, this should be agreed with your ex, to prevent them disputing this after you pass. A parent can override this wish in your will alone, as they automatically have a legal right to care for their children.

If you name a guardian in your will they will be able to make a claim to the court to care for the children if your ex disputes this. You can also put a letter of wishes with your will explaining why you don’t want your ex to be the children’s main carer.    

The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.

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