Inherited wealth in big divorces remains unresolved

22 November 2012

The recent case of Davies v Davies has been widely reported in the press as “the end of multi-million payouts for wives”. It isn’t the end. Separating wives and their lawyers can sleep at night. More importantly, the case shows just how hard the courts are finding it to establish new law on inherited wealth, or pre-marital business assets which one party brought into the marriage.

Mr and Mrs Davies lived together from 1997 to 2009 (marrying just over half way through). They ran a hotel in central London together. The complexity arose because Mr Davies had inherited the hotel from his family. By far the most important matrimonial asset, falling for division on divorce, appears to have been the hotel property itself (worth around £6 million).

Mrs Davies was awarded just under half the value of that asset, based on an assessment of her needs, and also her contribution to the running of the hotel business over a period of 13 years. The senior Court of Appeal judge presiding over the husband’s appeal has said he doesn’t see how needs are relevant in a multi-million pound case. His final judgment will be published imminently.

In an era of international and city hedge fund fortunes,  judges regularly base awards for “needs” on prime London housing worth say £3 million, so his remarks might to some appear a little out of date. Judges at the coal face like to deploy “needs” as a yardstick for the division because it gives them certainty in assessing the award. However, in a case like this, that side-steps a true assessment of the “non-matrimonial” financial input from one party.

Judges are grappling with just how to divide assets where there is non-matrimonial wealth. The Davies case has all the elements to present the courts with a headache: assets inherited plus mid length marriage, children,  the assets being the income generator (i.e. not simply investments), and, finally, the question of who put what into the business, or was there simply passive growth?

The fundamental problem with non-matrimonial asset arguments is that while the judges grapple with “principles” for the financial division, the cases get bogged down in their own facts (which used to be seen as a strength of the English system of discretion). In the leading Court of Appeal case in this area Jones, from early 2011 – the husband owned an oil sector business before the marriage. The result involved two senior judges between first decision and appeal disagreeing by 50% on the amount the wife should get. Mrs Jones’ award was bumped on appeal up by nearly £3 million.

This won’t be the last word from judges on non-matrimonial assets cases, and the Law Commission is looking at the problem.

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