Division on divorce

A recent decision by the Family Division of the England and Wales High Court (the Court) has highlighted that the manner in which assets are managed and utilised during a marriage can determine their treatment on divorce, resulting in outcomes that may seem unfair.

The case, WX v HX, concerned a couple divorcing after 33 years of marriage.[1] The husband was a banker and the wife a homemaker, with their combined assets totalled GBP55 million. These were mostly derived from the husband’s career but included GBP14 million originating from the wife’s family.

During the marriage, the husband used his income to meet the family’s outgoings and purchase their homes and other assets. The wife’s family assets (largely held in trusts of which she was a life tenant, with the trustees having the power to advance capital) were kept separate and, although she used the income to meet some of her outgoings, the capital remained untouched.

The husband argued that, following the parties’ divorce, all of the assets should be shared equally. The wife argued that she should retain her family assets and the remaining assets should be shared equally. The wife largely succeeded and exited the marriage with significantly more than half of the parties’ assets; an outcome the husband considered wholly unfair.

Matrimonial v non-matrimonial

The outcome reflects the Court’s differentiation between two classes of assets:

• matrimonial assets, which derive from the parties’ endeavours during the marriage, such as income they have earned or the value of a business they have developed; and
• non-matrimonial assets, which derive from a source outside the marriage, including assets received by gift or inheritance, or generated by one party pre-marriage or post-separation.

The starting point on divorce is that matrimonial assets are shared equally and non-matrimonial assets are retained by the spouse who brought them to the marriage. This can be departed from for a number of reasons, including where the parties’ needs so demand or based on a nuptial agreement. Additionally, non-matrimonial assets may be shared where they have been ‘mingled’ with matrimonial assets.

There was no debate that the funds generated by the husband’s banking career during the marriage were matrimonial and should be shared equally; the debate focused on the parties’ claims in respect of non-matrimonial assets.

The husband argued that he had brought USD10 million into the marriage: a combination of inheritance and accumulated pre-marital income. However, because he had not kept these assets separate and used them to support the family during the marriage, they had been mingled and lost their non-matrimonial character. By contrast, GBP1.7 million that the husband had inherited towards the end of the marriage and kept separate was held to be non-matrimonial.

Although the wife’s family assets had been kept separate, the husband argued that they should be treated as having been mingled, particularly because he had managed these funds for the wife, including negotiating their ‘exit’ from a family trust company and relocation into a tax-efficient offshore structure. His argument failed, as he had not shown that the wife had, through words or actions, manifested an acceptance that the assets should be treated as matrimonial. Rather, the wife had kept these assets wholly separate; they were outside the financial arrangements put in place to manage the family’s domestic economy.

The wife, therefore, emerged from the marriage significantly wealthier than the husband did. The husband’s frustration is understandable: his successful career and willingness to use the significant income it generated (as well as his pre-marital assets) for the benefit of the family had enabled the wife to keep her family assets separate, retaining their non-matrimonial character. It seems likely that during the marriage neither party appreciated the potential future significance of their decisions in this regard.

Conclusion

Considering how assets may be treated on divorce prior to or during a marriage may seem unromantic but could help clients avoid unpleasant surprises or unintended results, and allow them to take account of the issue in decision making regarding their domestic finances.

Those preferring to circumvent the Court’s approach to the division of assets on divorce should consider a nuptial agreement setting out how they wish their assets to be treated in the event of divorce. Such an agreement can be entered into before or during a marriage and will generally be upheld where the parties have entered into it freely and with a full appreciation of its implications, so long as it meets the parties’ needs.

Whichever approach is taken, factoring in the possible implications of a future divorce allows for comprehensive financial planning and can assist both parties in understanding their potential financial future.