These notes apply to both married couples who are divorcing and to civil partners wishing to dissolve their partnership.
Most divorcing and separating couples are able to agree a financial settlement. Sometimes they require help and that can come in many different forms. The alternative ways of resolving a settlement are explained in our note on the process options.
The purpose of this note is to give some guidance on the principles which apply to the financial settlements on divorce or dissolution.
Even if a settlement is agreed by the parties, it will usually be based upon the principles that would be applied by a court. Those principles derive from the Matrimonial Causes Act 1973 (the "Act") and guidance is given by the courts from time to time about how that Act should be interpreted.
The court has a wide discretion when making orders as to how finances should be divided on divorce or dissolution. The aim is to achieve a "fair outcome", which is done by considering a number of factors, set out in s.25 of the Act.
The only factor which has paramount importance is the welfare of the children. After that, the other factors which will be considered include present and future financial needs, the resources and earning capacities of both parties, their ages, the length of the marriage or civil partnership, health, the standard of living during the relationship and contributions of each to the family and finances.
The court deals with capital, income and pensions separately and then cross checks the proposed division of each to ensure fairness. The settlement will be based upon the assets as at the time of the settlement, though if there have been payments made since separation which were designed to be part of a settlement, they may be taken into account.
Beyond the consideration of these factors, there are no absolute legal rules about how assets are divided and about how much money has to be paid to one or other spouse. This is because each case will have its own specific circumstances.
In the majority of settlements, the predominant consideration is future needs and the solution is based on the level at which it is appropriate for those needs to be met.
If there are more than enough assets to meet needs, the court will usually order a broadly equal division of the assets and pensions, particularly where the relationship has been a long one. This is because the courts consider that financial and domestic contributions should be given equal weight and that this should be reflected in the asset division.
It is sometimes possible to argue for an unequal division, particularly where a distinction can be drawn between assets built up during a marriage and the family home ("Marital Property") and assets acquired before the marriage and sometimes inherited property ("Non-Marital Property"). Marital Property will usually be divided equally but Non-Marital Property may be ringfenced and therefore not subject to the same equal division. It will depend on specific circumstances and bespoke advice will be required.
The division of capital (assets and pensions) may also vary from equality depending on the liquidity of the resources and respective earning capacities. The court may also consider the principles of "sharing" and "compensation" (though the latter is rarely relevant).
The Family Home
Both parties have the right to occupy the family home until the marriage or partnership is formally dissolved, even if it is owned by one of them. This right can only be overturned where there has been violence or abusive behaviour which causes harm to the other party or children. It may however be possible to agree that only one party occupies the family home while the financial settlement is worked out.
The family home is not necessarily sold when there is a divorce or dissolution. A sale and division of the proceeds to meet needs may be necessary if there are insufficient other assets available. The level at which housing needs should be met for both parties will be one of the first issues to be resolved.
Even in short marriages, where one party brought the family home to the marriage, it will normally be treated as Marital Property and subject to equal division in the financial settlement.
The value of a business will be taken into account in working out a division of capital, even if one party has been solely responsible for building it up, and even if the value in it cannot be realised immediately. Often an independent valuation of the business by an accountant will be needed before a settlement can be reached.
Whether a party runs a business alone or in partnership, or has shares in a private company, the courts are reluctant to make an order which will destroy that business or its viability. If capital is required from a business, the aim will normally be to find out if/how it can be released without damaging the business.
The court may, however, consider forcing a sale of the business if there is no other way of raising an appropriate lump sum to compensate the other party.
All assets owned by the parties, from paintings to life insurance policies and from holiday houses to building society accounts, are taken into account in the financial settlement. The court can order the transfer of any assets from one party to the other, or vice versa, or order a sale as part of the financial settlement.
Some assets are more difficult to realise than others. It can be difficult to force the sale or transfer of overseas assets directly, but a lump sum can be ordered which means that overseas assets have to be sold in order to pay the lump sum.
Trusts and Inheritances
The value of trust interests needs to be disclosed. The court will look at the reality of the situation where one party is a beneficiary under a trust. For example, if trustees have been paying income to a party and providing capital on request, the court may assume that this will continue even if the trustees are not strictly obliged to pay them. If a trust is deemed to be a "nuptial settlement" then the court can order that the trust be varied as part of the overall settlement, if it sees fit.
Expectations of possible future inheritance are usually irrelevant. The courts recognise that Wills can be changed.
Where funds have been inherited during a marriage, it may be possible to argue that they should be excluded from the financial settlement, but this argument will not apply to most cases.
Maintenance and the Clean Break
A clean break is a settlement in which it is ordered that neither party can make any financial claims against the other in the future after the settlement is concluded. If one party cannot earn at all, or can only earn a little, a clean break will only be possible if he or she has enough capital to meet future needs.
There is no fixed percentage for spousal maintenance; it will depend on the level of income and needs. The courts encourage people who have not worked to be financially independent after divorce/dissolution and to earn what they can, subject to their age, health, family commitments, and the availability of appropriate employment. An older person with no employment history will not be expected to work if there are assets or income available to support him/her.
If the income is very high, maintenance orders may be made to allow the recipient to build up capital to meet needs in retirement.
Where there are dependent children, a clean break settlement will not be ordered unless there is sufficient capital to meet the needs of the parent who cares for them.
One party can be ordered to pay maintenance to the other for an indefinite period, or sometimes for a specified time. A short term order may be appropriate if the other party needs time to re-train. Maintenance orders come to an end automatically only if the recipient remarries or forms another civil partnership, and in the meantime either payer or recipient can apply to the court for a variation if circumstances change.
A party who receives maintenance can also come back to court years after a divorce to seek a cash sum or pension sharing order to "buy out" claims to maintenance. For the paying party, this is a big incentive to achieve a clean break at the time of the divorce.
Maintenance for children
A clean break settlement dismisses claims for maintenance between spouses, but claims for maintenance for children cannot be dismissed.
Maintenance for children who are resident in the UK is governed by the Child Support Agency though many people prefer to agree their own arrangements rather than use the CSA, which can be slow and inaccurate.
Under current CSA rules, the non-resident parent will generally be required to pay 15% of net income for one child, 20% for two and 25% where there are three children to support, regardless of the circumstances of their main carer. There is a new formula based on gross income for four or more children. There are upper limits on these figures for high earners. These figures can be reduced depending on the number of nights the child spends with the non-resident parent. Despite the apparent simplicity of the formula, there is considerable underlying complexity, particularly where the payer has investment income and capital.
The CSA rules are changing so that future calculations will be upon gross rather than net income. The percentages are also changing and this may mean people will pay more or less than they do under the current rules.
School fees, provision for children in further education and additional "top-up" maintenance claims for children are still dealt with by the courts outside the CSA.
If parties to a separation, divorce or dissolution agree the level of child support they can apply to the court for an order to be made in the terms agreed and so avoid the CSA. However under the new CSA system those agreed arrangements cannot override the powers of the CSA indefinitely. Where one parent lives abroad, maintenance is decided by the court rather than the CSA.
On divorce, one party often loses potential entitlement to a widow’s or widower’s pension or death in service benefits from their ex-spouse’s pension and may not have built up their own pension. They may need alternative provision.
Possible solutions include giving them maintenance or capital instead of pension, making alternative insurance arrangements or giving a proportion of a retirement lump sum to them when the ex-spouse receives it.
The courts can also order "pension sharing", the division of a pension fund between parties at source. This gives the recipient a freestanding pension fund to which they are entitled in their own right.
The effect of behaviour
One party’s conduct is only relevant to a financial settlement if it is so extreme that it is far outside the range of normality. A great many spouses have complaints on marriage breakdown about the other’s behaviour, but only a tiny minority will have behaved in such a way that their conduct will be taken into account in making the financial settlement. The grounds for divorce/dissolution will only very rarely have any bearing on a financial settlement.
Financial misconduct during the divorce or dissolution process (such as a failure to disclose assets) may however lead to a financial penalty.
New spouses and cohabitees
The financial position of a new partner is usually only relevant insofar as it relieves that party of expense. If, for instance, a party plans to live with their new partner who owns a house, less weight may be given to their wish to buy a house for themselves in the immediate future.
Any maintenance order comes to an end when a recipient remarries. If a person receiving maintenance cohabits instead and this new partner supports them, the ex-spouse can apply to have the maintenance reduced or extinguished. However, living with another person will not in itself bring the right to receive maintenance to an end.
A financial settlement can be worked out at whatever time one is needed. This may be:
- when a couple decide to separate and find a solution by voluntary agreement; or
- when divorce proceedings are issued (or any time afterwards, as long as the person applying has not remarried).
Assets are valued at the date when the financial settlement is being worked out, which may be different from the date of separation.
Orders requiring parties to transfer property, pay lump sums to each other, or share their pensions can only be made after a decree nisi of divorce or dissolution. Spouses are, however, legally obliged to maintain each other and their children during the marriage as well as after the marriage has ended. The court can order regular monthly or weekly maintenance payments to a party while the marriage still exists and after it has ended.
Even if everything has been agreed, a court order should be made in the terms agreed. If no order is made, claims may be made many years after the end of the marriage.
Tax and the date of separation
If assets are sold or property transferred between the parties, capital gains tax may be a problem. It is essential that advice is taken as early as possible during the tax year in which separation (not divorce or dissolution) takes place.
The process for determining a financial settlement can take many different forms and the options are set out in a separate note. In all cases though, the parties will need to give full disclosure of their financial and other relevant circumstances. If either party intends to remarry or live with a new partner, that must be disclosed. Failure to disclose something may lead to a settlement being set aside in the future.