For married couples divorcing in the UK, a French property may be part of the assets to consider in the separation process. Nonetheless, there are many possible modalities depending on the actual circumstances of the couple, the way they own the French property and what is intended with the said asset.
Prior to determine options, it is relevant to mention that most couples will purchase a French property in indivision which is the form of legal ownership of property applied by default in France. This means that each co-owner holds an undivided share of the property and it can be likened to the English tenancy in common.
Because indivision will often lead the title deed of the French property to indicate that it is owned in equal shares, it is particularly advisable to ensure this is taken into account when transferring ownership to the sole name of one of the spouses against compensation or when distributing the sale proceeds if its disposal was agreed or ordered upon divorce.
It is also worth mentioning when discussing the terms applied to the couple’s French property that its content should also be taken into consideration.
Transfer in sole name and compensation
The property can be transferred in sole name of one of the spouses as a result of the agreed or ordered financial remedy and the other spouse may be compensated by a lump sum (or the transfer of another asset). In order to estimate the compensation figure, an estimate should be retrieved and the modalities to obtain an estimate will differ depending on the level of risk of dispute on this point.
If the ex-spouses have acquired in equal shares, the compensation should theoretically be half of the property value. Naturally, other aspects can be taken into account such as the respective contributions on repairs and maintenance or the mortgage repayments. In any case, it is advisable to correctly evidence each aspect to allow a justified calculation. If the compensation resulting from the transfer of ownership of the French property is not sufficiently evidenced, there is at least a theoretical risk that the French tax authorities will consider the operation a sale or a gift with possible adverse tax consequences.
If the French property was financed by the couple through a mortgage, their divorce will not automatically waive their obligations towards liability of the repayments. If the couple is not prepared to sell the property and wishes to transfer the ownership to one of them, the bank may not necessarily agree to also transfer the mortgage to the sole remaining owner. It is therefore relevant at the outset to determine the financial feasibility of how the couple wishes to deal with the asset.
Property sale and distribution of the sale price
Another option is to determine the distribution of the proceeds after the sale of the property by both spouses. Ideally, this may be done before the divorce is pronounced but many circumstances can lead to include the sale in the financial remedy order.
Upon completion, the net sale proceeds would first be affected to the repayment of the mortgage, if any, and the remaining amount would then be distributed between the ex-spouses. By default and in line with the ownership in indivision, a distribution of the sale proceeds may be made in equal shares proportionately to how it is registered on the title deed. As mentioned previously, a different distribution would need to be justified and formally agreed by the parties.
Because any option chosen by the ex-spouses will affect the way the property is recorded with the local Land Registry and as any kind of transfer of ownership of property will incur taxes, the registration of such transfer must be made with a notaire in France.
Notaires have a monopoly on the registration of ownership of property and, as such, he or she must be involved at the latest when it is necessary to register the deed of sale on completion or to formalise the transfer of ownership in the sole name of one of the spouses.
“Notaires are public officers, authorised to receive all deeds and contracts to which the parties have or want to give the character of authenticity attached to acts of public authority, and to ensure the date, keep its record and deliver the original deeds or copies” (Article 1 of the Statute n°45-2590 of 2nd November 1945 relating to the status of notaires).
Notaires have received delegation by the French State to act on behalf of private parties but are not representing the interests of either. In addition to its neutral position, the notaire is a tax collector and, as a result, may not be able to advise on the tax aspects of the operation or work in the parties’ best interests.
Whether dealing with a sale and even more so in case of transfer to one of the spouses, the notarial deed should correctly include the terms agreed in the financial remedy order.
Depending on the modalities chosen, various costs would need to be taken into account.
These fees include disbursements, taxes, various duties as well as searches at the Land Registry.
Please note that since 1st January 2021 the “stamp duty” in case of transfer to one of the spouses has been decreased to 1.8% and from 1st January 2022 it will decrease further to 1.1%.
Obtain a clear quote from a notaire at the outset will allow to factor this cost into the financial remedy.
Usually, notarial fees incurred on the sale of a property are payable by the buyer.
Capital Gains Tax (CGT)
French law provides a CGT exemption when registering a transfer to one of the spouses as a result of divorce. Nonetheless, in case of subsequent sale of the property, CGT is payable on completion from the date of its acquisition by both spouses.
Alternatively, in case of sale by the couple, CGT will be payable according to the share they respectively own.
Prior to calculating the CGT liability, it must be highlighted that, under the current French legislation, capital gains are subject to both income tax at a rate of 19% and social security contributions at a rate of 17.2%. The UK-France convention to prevent double taxation dated 19th June 2008 with respect to taxes on income and on capital gains does not apply to social charges which therefore cannot be deducted from any UK CGT liability. UK advice should also be sought on this point to clearly assess the costs attached to the sale of the property by one or both spouses.
Since 1st January 2021, a tax representative must be appointed in France for disposals exceeding €150,000.00, which is also a cost not to overlook when preparing the financial remedy order.
The modifications to a mortgage, if agreed by the bank, may incur additional costs.
In addition, please note that depending on the situation of the property in case of sale, there may be additional surveys to be covered by the vendor(s) (e.g. asbestos, lead poisoning, energy performance certificate).
Finally, should an estate agent be appointed to market the property, the terms of the agreement may make the commission payable either by the vendor or the buyer.
Overall, there are common rules applicable to all divorces but it is extremely relevant to take into account the subjective aspects of each situation which can heavily influence how to deal with the French property owned by the separating couple. The added difficulty to implement a foreign document the financial remedy order) to a French notarial procedure (whether to transfer to one of the spouses or to sell) can increase the risks of miscommunication and errors, and independent advice with a specialist should be sought.