Court of Appeal and Division of Family Assets

06 November 2007

The way the Courts have approached the division of the family assets on divorce has undergone radical change since the start of the millennium. Although this development continues, as the recent decision of the Court of Appeal in the case of Mr and Mrs Charman has shown, it is still possible from a study of the judgements over the last seven years to predict how the divorce courts will apportion the resources of those families not possessed of the fortunes involved in the high profile litigation reported in the press.

It has been confirmed beyond doubt, in the earlier case of Miller, that the issue of which party was to blame for the breakdown of the marriage is not, save in the most exceptional circumstances, of any relevance in determining financial questions. In the vast majority of divorces, it is far better if the parties focus on the practical arrangements for the future than recriminations over the past.

The main difference between the new regime and the old is the way in which the respective contributions of the salary earner and the homemaker are now assessed. Before the House of Lords decision in White, the homemaker’s share was limited to the amount required to meet his or her reasonable requirements for housing and maintenance, based upon the standard of living during the marriage. Now the homemaker’s contribution is regarded as equal to the salary earner’s save in the case of “exceptional contribution”, a topic which I turn to further below.

So, do family lawyers now just add together all the assets and divide by two?

The answer is:- “not all of the assets and, even in relation to the assets that count, only in order to consider whether a settlement is fair.”

To arrive at any proposed settlement in the first place one must first consider a number of other factors.

The change of emphasis signalled by the higher courts will mainly apply to a minority of cases where the assets and income are more than sufficient to meet the needs of both parties and any children. For most people, the amount of capital required to purchase a second property and the amount of income required to run two homes are the main factors which determine the financial division. However, even in these cases, the long term arrangements, after the children have finished their education, may require the division to be evened up in favour of the other parent, after the parent with care has had the use of the main asset to house the children.

What assets can be excluded?

Once again, if there are more assets than are required to meet the family’s immediate needs, then some assets may be kept out of any division. If there are only just enough or insufficient assets, then such distinctions become harder to make.

The classic example of assets which may not be taken into account are assets acquired following the date of separation. However, the words “to which the other spouse has made no contribution during the marriage” need to be added.

An inheritance or a lottery win are likely to be examples of such assets. An increase in the value of property acquired during the marriage, a bonus or an allocation of shares as a reward for years of investment or service when the parties were together are not.

To complicate the issue still further, it may now possible to argue that future earnings may be derived from "the matrimonial acquest" and that if one partner owes their ability to create wealth in the future to the support of their spouse during the formative years of their career, then that capacity should be divided, even though the income will not be generated until after separation.

Certainly where the earning capacity of one party is much greater, particularly where the other spouse has given up a profession or high earning employment to look after the family, leaving the other to develop their career, the homemaker may be entitled to a future income above and beyond their reasonable requirements as compensation for the sacrifice that they have made.

Similarly, where the homemaker has no choice, because of the needs of the children, but to continue to sacrifice their own career and opportunity to build up a pension of their own, that loss of opportunity may need to be taken into account prospectively by awarding them a greater share of capital.

What about contributions made before the marriage, such as cash to buy the first home or pension entitlements earned primarily before the parties met?

Over time, such individual contributions will diffuse into the matrimonial assets, so that after a long marriage of 20 years or more, most disparities will have been smoothed away by years of joint endeavour.

In relation to shorter marriages, some recognition of the position that the parties were in prior to the marriage may occur, but the decision in Miller appears to indicate that the diffusion towards equality takes place much more quickly than had been believed to be the case previously.

What can be done to preserve assets brought into the marriage?

For the foreseeable future, anyone who is contemplating marriage would do well to consider agreeing in advance with their future spouse what assets they are bringing to the marriage, which assets are being pooled for the future benefit of both spouses and which assets will be kept separate in the event of a marriage breakdown.

Such agreements will be particularly important where the marriage breaks down after a relatively short time. While pre-nuptial agreements are not binding on the Court they may at least reduce the scope for disagreement between the parties in the event of divorce and increase the prospects of a negotiated settlement and a considerable saving in legal costs.

One important exception to this general rule comes in the form of inherited property that has been in the same family for generations with an expectation that it will be retained for future generations. In those cases the Court may return to an assessment of the other party’s reasonable needs.

What one cannot do, as Mr Charman has discovered, is set up such a dynastic succession during the course of an existing marriage, by setting aside a large proportion of the family’s wealth for the benefit of future generations, making it unavailable to the other spouse (unless one also makes it unavailable to oneself).

Lastly, I return to the issue of exceptional contribution during the marriage, which was also discussed in the Charman case. Regrettably, other than confirming that generating over £100 million is exceptional, the Court of Appeal have given little guidance as to what constitutes exceptional wealth creation. For anyone other than an entrepreneur or talented individual who has earned more than £30 million, it is safe to assume that, in this context, hard work and business acumen will be valued no more and no less highly than running a home, caring for children or being a supportive spouse.

For more information please contact James Muir-Little, Partner.
 

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