George Osborne's Budget on 21 March 2012 contains several elements which affect family lawyers doing international cases with substantial assets.
As of midnight on the day of the Budget, stamp duty on buying a property in excess of £2 million went up to 7%. At the moment it is 4% above £500,000 and 5% above £1 million. Unlike income tax which is graduated , ie higher rates in respect of higher tranches of income, this is a straight percentage. So a property worth £1 million has stamp duty of £50,000. Therefore a property now purchased for £2 million will have stamp duty of £140,000. Given that such a purchase post-divorce may well be arising from a needs-based divorce settlement (instead of or part of sharing), lawyers must take this stamp duty liability into account in the calculation of needs. We are very good at taking into account 3% costs of sale. We must bring stamp duty into account more often and certainly with more expensive properties. Compared to what sometimes appears at box 3.2 of Form E, eg the traditional "reasonably priced saloon" (or Maserati if buying for £2m!), stamp duty must be included and taken into account in quantification of needs for alternative accommodation. My guess is that possibly as much as a third of properties affected by this stamp duty are purchases from a divorce settlement or, more often, prompted by a divorce.
As often with so called cliff-edge tax thresholds, it will affect properties valued at around £2 million in value which on being marketed will be now pitched just under rather than over. Matrimonial valuations will be consequentially affected.
Next, and with literal immediate effect on the Budget, anyone buying a residential property over £2 million through a company (delicately but charmlessly described by HM Treasure in its Budget Report as a "non-natural person") now pays 15% stamp duty, instead of 7%. This is part of the ways to overcome a tax loophole whereby companies including offshore companies purchased real properties and at the time of sale only the company was transferred, not the land itself as the company owned the land. So stamp duty was avoided. This option is now less attractive or may even fall into disuse. Instead of 7%, it is now 15% stamp duty. It only applies to purchases over £2m.
Coupled with this, although not in force until April 2013 and then subject to consultation, capital gains tax will be extended to the gains of disposals of UK residential property and shares and interests in such property. Although the HM Treasure Report does not explicitly say, this would very probably be in relation to properties over £2 million. (It is also possibly alongside a so-called Mansion Tax from April 2013 being an annual charge on residential properties valued at more than £2 million owned by these so called "non-natural persons", ie companies.)
So in combination, these residential properties purchased through companies will be caught on purchase with 15% stamp duty, have an annual tax charge and then be caught by CGT on sale. The device suddenly looks much less attractive.
Over these next 12 months until April 2013, much thought will be given by private client advisers to parties who have used this manner of holding property. Most likely some will take properties out of the corporate holdings over the next 12 months. When outside the protection of offshore corporate holdings, they will thereby be more vulnerable to divorce claims. I expect many will place properties into trusts instead. The English higher family courts are more wary and sensitive now than a few years ago about piecing the trust veil or declaring trusts a sham especially when it would offend local law or practice where the trusts are based. Nevertheless the English family courts have a tradition and reputation worldwide of looking at the realities of true ownership including through trusts. So putting assets into offshore trusts is a potentially risky venture in terms of divorce court orders and powers.
But help is at hand. England is now much stronger in law in respect of marital agreements post Radmacher. This is especially if needs, maintenance in the EU definition, is excluded so that whatever else is agreed, there is still power and discretion with the court to provide for needs. For those embarking of moving property out of company holdings into trusts or other vehicles not falling foul of the Budget legislation, it would be very wise indeed to enter at the same time into a marital agreement. This should be after specialist legal advice and disclosure to make there is a full awareness of the implications of the agreement. Such an agreement will create more certainty and make less likely any successful divorce claims would be made. The Chancellor may yet again have precipitated more work for family lawyers!
He is an English specialist accredited solicitor, mediator, family arbitrator, Deputy District Judge at the Principal Registry of the Family Division, High Court, London and also an Australian qualified solicitor, barrister and mediator. He is a Fellow of the International Academy of Matrimonial Lawyers and chair of the Family Law Review Group of the Centre for Social Justice.
David is the author of a new major reference work, The International Family Law Practice as well as A Practical Guide to International Family Law (Jordan Publishing, 2008). He can be contacted on firstname.lastname@example.org.
The views expressed by contributing authors are not necessarily those of Family Law or Jordan Publishing and should not be considered as legal advice.