It’s an asset – just not a marital one!

21 March 2012

We frequently advise spouses who have significant assets generated prior to their marriage, or who have assets in a trust tax shelter.  On divorce, how should those assets be treated?  This question has taxed our higher courts recently, in several cases. 

In Jones, the court was concerned with a husband who had earned the lion’s share of his fortune in the oil business prior to marrying.  When considering what the wife should receive, the Judge decided it was fair to deduct from the overall asset pool a proportion that recognised the husband’s assets earned pre-marriage.  A cross-check should then be applied, to see (applying this deduction) what proportion of the assets the wife would receive.  This was to ensure the outcome remained fair.  In Jones, the wife was awarded 32% of the assets of approximately £25 million.  Her discounted percentage share was in recognition of the fortune the husband had acquired prior to the relationship. 

This issue also arises where one spouse has inherited assets (see the case of Robson).  Our courts have adopted a similar approach to that outlined in Jones, emphasising that each case must be approached and decided on its individual facts.

The trend that seems to be emerging is, if the asset pool is not in the ultra high net worth realms (that is to say, assets greater than £10 million), then the deduction applied due to any non-marital component will be proportionally smaller.  Correspondingly, as the asset base increases, so does the deduction which our courts are inclined to apply in recognition of any non-marital element. 

We have recently settled a High Court case on terms where the wife receives 45% of all the assets.  This is despite the fact that those assets (around £7 million) had their genesis in gifts by the husband’s family before the marriage (thirty-five years previously).

Contrast this with another of our cases – the case of K -v- L [2011] 2 FLR 980 - where the husband was awarded 9.3% (translating to about £5 million) of the asset base of £57 million (entirely the wife’s fortune consisting of shares she had inherited long before she and the husband married).  The husband unsuccessfully appealed that decision to the Court of Appeal.  It is arguable that the very significant size of the asset pool gave the Judge more room for manoeuvre in terms of deciding what was a fair outcome. 

A related area is cases where discretionary trusts are established during the marriage as tax shelters.  To what extent can the interests of, for example, the children of the marriage be protected if they are potential beneficiaries?  Whilst the divorce court has powers to rearrange or cancel some marital trusts, to what extent is that fair?  Whose interests should prevail, where the court is faced with a potential future beneficiary (say a child now in their twenties) and a wife in her sixties?  We are instructed in an ongoing High Court case in which these issues arise, and will provide answers and further guidance as this area of divorce law develops.

 

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