Discretion to adjust parties' financial position
Distinction between matrimonial and non-matrimonial property
Protecting inherited assets
The future
On August 12 2011 the Daily Telegraph reported: "A wife is not entitled to a £7 million share of her husband's £24 million fortune after 25 years of marriage because he inherited it from his father, a divorce judge has ruled." This case for ancillary financial relief following a divorce(1) highlights the wide discretion that the courts have when dividing assets between divorcing parties and the equally wide guidelines that they have set. These present a challenge for wealthy individuals, especially those who have significant inherited property which they wish to protect against divorce.
Discretion to adjust parties' financial position
In order to achieve a fair result, the court has wide discretion to make financial provision to adjust the financial position of the parties under the Matrimonial Causes Act 1973 following a decree on divorce. The court must have regard to a wide range of factors, including income, earning capacity, financial needs, standard of living and any disability of either party. Particular regard is given to the needs of any children in the marriage. The court will look at the property and financial resources that are available to the parties at the time or will be available in the foreseeable future.
Distinction between matrimonial and non-matrimonial property
When considering the parties' assets, there is no formal distinction between non-matrimonial property and matrimonial property in English law (unlike in other jurisdictions, such as Scotland and New Zealand). However, in 2001 the House of Lords distinguished between inherited or pre-owned assets and matrimonial assets in White v White.
Depending on the facts, in subsequent cases the courts have sometimes treated inherited or pre-owned assets and matrimonial assets differently when deciding on how the former should be divided between the parties. Where factors such as need, compensation and provision for children are significant, distinguishing between these categories of asset will make little difference, as such factors will dictate the division of the property. However, where such factors are less significant, the distinction may be important. In a number of recent cases the courts have considered what may be regarded as inherited or pre-owned assets and matrimonial assets, and how each type of property should be divided between the parties.
Length of marriage
In K v L [2010] Lord Justice Wilson provided useful indications of the way in which the length of a marriage can affect what will be considered a matrimonial asset. The length of a marriage can often be a key factor, as the source of a pre-owned or inherited asset may diminish in importance with time if:
- inherited or pre-owned assets are increasingly outweighed in significance by matrimonial assets;
- inherited or pre-owned assets become mixed with matrimonial assets and difficult to separate; or
- the contributor of the inherited or pre-owned assets uses them to purchase matrimonial assets, such as the marital home.
In White v White Mrs White was awarded 40% of the couple's net assets after 33 years of marriage, despite a significant loan from Mr White's father to buy a property and working capital to start the couple's business at the beginning of their marriage. The court found that the source of the loan had become less significant as the couple had built their farming business.
On the other hand, in Miller/McFarlane 2006 the House of Lords departed from equality for the pre-owned assets of Mr Miller following a marriage of two years and nine months. Mrs Miller was awarded only one-third of the value of the shares in Mr Miller's business, reflecting the fact that he had built a successful business before his marriage.
Lifestyle
The manner in which parties use inherited or pre-owned assets can affect how they are divided. In Robson v Robson [2010] Mr Robson was unsuccessful in ring-fencing his inheritance after 21 years of marriage. The court awarded Mrs Robson one-third of his total assets, finding this to be fair in light of the use to which her husband had put his inherited wealth. He was judged to have managed his inheritance irresponsibly and the couple had treated it as matrimonial property, using it to fund an extravagant lifestyle. Mr Robson's argument that the inheritance was for future generations of his family was dismissed.
In contrast, in K v L [2010] the court gave Mr K only £5 million of Mrs L's £54.7 million inherited assets after over 20 years of marriage. The court considered that Mrs L had effectively ring-fenced these assets from the matrimonial assets, as she had always held the inherited shares in a family business in her name and the couple had enjoyed a modest lifestyle.
Factual matrix
Despite the themes that can be drawn from these cases, the court will look at the complete factual matrix, weighing all the factors. As noted in N v F [2011], such cases are "highly fact specific and very discretionary". For example, given the results in White v White and Miller/McFarlane 2006, one might have expected that the long marriage of the parties in D v D [2010] would have resulted in the assets - predominantly an inherited farming business worth around £8.5 million - being split equally. The court decided to award the wife £1.5 million - a relatively small proportion of the husband's estate - to ensure that he would not have to sell the farm, but offset this with fairly high periodical payments of £80,000 to £90,000 to the wife.
Measures can be taken to protect inherited assets or, at least, to reduce the proportion of inherited assets awarded to the other party. Given careful thought and forward planning, the risk that inherited and pre-owned assets will be divided equally on divorce can be significantly reduced.
Individuals should be encouraged to think about succession planning before they or their children contemplate marriage. It is important to:
- show clear dynastic intent in relation to inherited property; and
- establish ownership structures where such assets are distinguished from matrimonial assets and those used for everyday living.
Consideration should be given to a pre-nuptial agreement to protect inherited assets, as the Supreme Court's judgment in Radmacher v Granatino [2011] showed a greater willingness on the part of the English courts to consider such agreements. Although pre-nuptial agreements are not enforceable as contracts under English law, Radmacher v Granatino restated the overriding principle in K v K (Ancillary Relief: Pre-nuptial Agreement) [2003] that for a pre-nuptial agreement to be given decisive weight, it should be fair and reasonable to hold the parties to it. There is no formula by which to determine what will be regarded as 'fair and reasonable'; rather, the whole factual matrix must be considered. Therefore, it is important to obtain legal advice before marriage to ensure that a pre-nuptial agreement reflects the parties' intentions and is fair. Even if this is done, it may not be fair and reasonable to hold the parties to the agreement 20 years later when they have children or when either party may have built or lost a fortune. Therefore, it is equally important to review a pre-nuptial agreement regularly (eg, every five years) in order to ensure that it continues to reflect the parties' fortunes and circumstances. In Radmacher v Granatino Lord Philips saw nothing inherently unfair in an agreement covering inherited property. A pre-nuptial agreement, although not legally binding at present, may provide the best protection.
Many of the judgments in this area caution against taking the cases as precedents and reiterate that fairness is an overarching principle. Lord Justice Robinson's words in Ward [2010] are a reminder to advisers of the courts' approach in ancillary relief hearings: "The fact is that no formula and no resort to percentages would provide the right answer. Weighing the various factors and striking the balance of fairness is after all an art not a science."
It remains to be seen whether English pre-nuptial agreements receive firmer legislative backing. Having consulted on proposals for enforceable marital property agreements in early 2011, the Law Commission is due to make its final recommendations in Autumn 2013, following a supplementary consultation (due in Autumn 2012) on the law relating to needs and non-matrimonial property. Its recommendations may have far-reaching effects on the advice that wealth planners and matrimonial lawyers provide to clients.
For further information on this topic please contact Catharine Bell at Lawrence Graham LLP by telephone (+44 20 7379 0000), fax (+44 20 7379 6854) or email ([email protected]).
Endnotes
The author gratefully acknowledges the assistance of trainee and co-author Hilesh Chavda in preparing this update.