Sorting out the financial settlement on divorce is often the biggest battleground, but it does not have to be so. The basic principles are actually quite simple and reaching a financial settlement should be relatively straightforward in the majority of cases, so long as both parties understand those principles.
The starting-point in all cases is equal division of all assets. However, either party can claim that they are entitled to more than 50% of the assets for any relevant reason, the most common of which are needs (that is, their needs are greater than the other party’s needs) and contributions (that is, their financial contribution to the marital assets was substantially greater than the other party’s contribution). These will be discussed in more detail below.
Establishing the matrimonial assets’ value
What, then, are the assets? Unless your financial assets are very few, I recommend that a schedule of assets be drawn up and, if possible, agreed with your spouse. An asset schedule simply lists all of the assets and their values, usually in three columns, one for
joint assets and one for assets belonging to each party, totalled at the bottom. Note the following:
1 Written confirmation of asset valuations should be obtained, if possible, such as bank statements, share valuations, endowment policy surrender valuations, and so on.
2 Only include assets of significant value – say, £500. Personal possessions should not be included (they will usually remain the property of that person), unless they are of high value, such as items of jewellery.
3 Similarly, furniture should not be included save for items of high value, such as antiques. Remember that the court values assets as at the time of the settlement, so the current, second¬hand value is what counts, not the original purchase price. Obviously, the second-hand value of most items of furniture is minimal, so it is generally not worth arguing over division of furniture – even where both parties have solicitors, the solicitors normally leave it to the parties themselves to agree division of furniture.
4 The valuation of the (former) matrimonial home (and any other properties) is often
a sticking point. At least one written professional valuation should definitely be obtained – two or more will give a more accurate picture. Most estate agents will offer a free valuation but make sure this is a market valuation (that is, how much the property will actually realise on sale) and not just, for example, a valuation for a quick sale. Do not rely on mortgage valuations – mortgage companies are only concerned that the value of the property will cover the amount they are lending, not with the full value of the property. The most accurate valuation will come with a full
structural survey, but these are expensive. Once again, the value of the property should be agreed with your spouse. This can be achieved, for example, by each party obtaining their own professional valuation and, if they differ, agreeing a figure mid-way between the two. Alternatively, the parties may agree to jointly instruct one professional valuer (and share the valuer’s fees) and agree to be bound by the valuation.
5 Pension valuations must be obtained. The figure that the court will require is the cash equivalent transfer value (CETV ), or the amount that could be transferred out of that pension fund into another. Some pension providers include a CETV on the annual statement that they send out to the pension holder, otherwise you will need to request a written CETV from the provider. Note that some CETVs provide a less realistic picture of the real value of the pension than others and can considerably underestimate the real value of the pension. This can be especially true of public sector pension schemes, especially police and army pensions. If in any doubt, you should consult an actuary or at least an independent financial adviser. Once the pension valuation has been obtained and agreed, it can be put in the asset schedule, either with all of the other assets, or separately, if pensions are going to be dealt with by way of pension sharing – see below.
6 It is arguable that certain assets should not be included as matrimonial property. The most common of these is inheritances – the party that received the inheritance arguing that they should keep it, without it being taken into account as part of their share of the matrimonial assets. Note, however, that there is no rule that inheritances should be left out of account. I would suggest that the argument is more likely to
succeed in short marriages or, perhaps, where the inheritance was received shortly before or after the parties separate. In longer marriages the argument is less likely to be successful, especially where the inheritance has been spent. For example, where the inheritance, or part of it, has been spent on the matrimonial home, then it clearly becomes matrimonial property, as the matrimonial home is always a matrimonial asset.
Dividing the matrimonial assets
Having established the value of the matrimonial assets available, the next question is, of course, how should they be divided? Having stated above that the starting-point in all cases is equal division of all assets unless there is a good reason to depart from equality, we need to consider in detail what would constitute a good reason for such a departure. Section 25 of the Matrimonial Causes Act 1973 sets out a (non-exhaustive) list of the factors to which the court should have regard when considering a financial settlement, and these give some clues as to what would constitute a good reason:
a) The income, earning capacity, property and other financial resources which each of the parties to the marriage has or is likely to have in the foreseeable future, including in the case of earning capacity any increase in that capacity which it would in the opinion of the court be reasonable to expect a party to the marriage to take steps to acquire – This one is pretty obvious and self-explanatory. If one party’s income is substantially greater than the other party’s income, then the other party can claim a greater than half share of the assets to compensate, although this is usually argued under needs –
see below. Note that income includes earning capacity, which should be used if one party can or will in the foreseeable future clearly earn more than they are earning at present. As to property, this factor really just deals with the ascertaining of the assets for division, as described above. Note, however, that if one spouse is going to acquire an asset in the foreseeable future, then that could be a good reason for the other spouse to receive more than half of the assets currently available.
b) The financial needs, obligations and responsibilities which each of the parties to the marriage has or is likely to have in the foreseeable future – As indicated above, this is one of the most common reasons to depart from equality of division. The most likely reason why one party’s needs are greater than the other’s is that they will be looking after the children. Specifically, they will need accommodation suitable not just for them but also for the children. For example, if there are two children and they are to reside with the wife then, on the face of it, she could argue that she needs a three-bedroom property, whereas the husband only needs a one-bedroom property. As mentioned above, this can be linked with disparity in incomes so, for example, if the wife has a lower income then her mortgage capacity will be less, and she can therefore argue that she needs a greater share of the capital. Where the matrimonial home has not been sold, needs can also be addressed by allowing the wife to remain in the matrimonial home until the children have grown up. In this case, it will still have to be decided how the net proceeds will be divided after the property is eventually sold. Note that in high-money cases the greater needs of one party may not be relevant, where they can be met by a half share of the matrimonial assets.
c) The standard of living enjoyed by the family before the breakdown of the marriage – Again, this is only usually relevant in high-money cases, as in most other cases it is a simple fact of life that when a couple split up each party will have to suffer a lowering in their standard of living.
d) The age of each party to the marriage and the duration of the marriage – If one party is significantly older than the other then they could argue that they should have a greater than half share of the assets, as they have less working life left to build up assets. A specific example here would be re¬housing – an older person would not be able to borrow so much on mortgage, as the mortgage term would have to be shorter. Also relevant is whether or not one of the parties is at or approaching retirement age, as obviously their income is likely to be less in retirement. As to the duration of the marriage, this does not usually have much effect upon the amount of a settlement unless it is a very short marriage, in which case it can be argued that the parties should just be put back in the same financial position they were each in prior to the marriage. What constitutes a short marriage is not defined, but the courts generally seem to interpret the term quite strictly. Accordingly, a marriage of three years or more is not considered to be short, so a very short marriage is probably one that lasted no more than a year before it broke down. Duration of the marriage can also be relevant to contributions – see below.
e) Any physical or mental disability of either of the parties to the marriage – Pretty obvious and again part of the needs argument, for example, a disabled party might need extra money to convert their home to meet the needs of their
disability. Note, however, that a terminal illness could actually reduce needs, especially if life expectancy is very short – that party only needs to provide for themself for a short period of time and the court would not be concerned about providing for the beneficiaries of their estate.
f) The contributions which each of the parties has made or is likely in the foreseeable future to make to the welfare of the family, including any contribution by looking after the home or caring for the family – A common argument, especially by husbands, is that they were the main or only breadwinner during the marriage and that therefore they should have the lion’s share of the assets. As this factor makes clear, this is not true. It is more accurate to consider that his contribution is equalled by the wife’s contribution, in looking after the home and bringing up the family. In most cases, contributions are made at the outset of the marriage, for example one party putting in significantly more money to the purchase of the matrimonial home. That party will seek to recover those contributions by claiming a greater than half share of the matrimonial assets. Here, the duration of the marriage can be relevant, as the longer it goes on the weaker the argument usually becomes – the assets become ‘mixed’ over time and can no longer be said to belong to one party or the other. If a financial contribution is made later in the marriage (not including an inheritance – see above), this generally can only be recovered if the total assets are enough so that the other party is left with sufficient to meet their needs.
g) The conduct of each of the parties, if that conduct is such that it would in the opinion of the court be inequitable to disregard it – It is often argued that the other party should
receive less due to their conduct but it is very rare that this is actually relevant to the financial settlement. Certainly, adultery and most forms of unreasonable behaviour will have no bearing. To be relevant the conduct will have to be of a very serious nature, such as a threat to kill, and even then this is no guarantee that a court would penalise that party by reducing the amount of their settlement. Note that conduct during the course of the proceedings, such as failing to cooperate or comply with the requirements of the court, is not usually penalised by a lower settlement but can be penalised by an order that that party pay a contribution towards the other party’s costs.
h) The value to each of the parties to the marriage of any benefit which, by reason of the dissolution or annulment of the marriage, that party will lose the chance of acquiring – This factor is primarily concerned with pensions. If your spouse has a pension, then you will almost certainly be a potential beneficiary under the pension scheme if they were to die and therefore you will lose that potential benefit when the marriage is dissolved. The ways of dealing with pensions are discussed in more detail below, but could be a reason to depart from an equal division of other assets where one party keeps their pension and the other party has more than half of the other assets to compensate.
Where does all of this leave us? In short, if everything is approximately equal between the parties, including income, capital assets, pensions, needs and contributions then an equal division is appropriate. If not, then an unequal
division may be appropriate.
Unequal division of assets
The next question is – if an unequal division is appropriate, then how much should each party receive? This depends upon the reason for the unequal division. If, for example, the reason is that one party contributed more, then it may just be a simple matter of that party receiving that sum back and the rest of the assets being divided equally. Things can, however, get more complicated when the reason is that one party’s needs are greater than the others (often linked with that party having a lower income). Here, there is no formula used to calculate each party’s share and it is more a case of coming up with a percentage figure (of the total assets) and deciding whether that appears to be fair, after considering how it will leave each party. If, for example, the disparity in needs is relatively small then a 55/45 or a 60/40 division in favour of the party with greater needs may be appropriate. If, on the other hand, the disparity is considerable, then a 70/30 or even an 80/20 division may be appropriate. In extreme cases, it may even be appropriate for one party to receive 100%. An example of this could be where the only asset is the matrimonial home, the wife has a very low income and the husband has a substantial income – the husband might agree to transfer his interest in the property to the wife, in return for the wife making no claim against him for maintenance.
It would be impossible to give examples of all possible scenarios but the following illustrations may assist in showing how settlements are worked out in practice. (Note that each illustration is simplified, both in its facts and its outcome, and assumes that there are no other factors which may influence the settlement. Note also that these are only possible reasonable outcomes – there is no such thing as a ‘definitive’ outcome to a given set of facts.)
Illustration 1 – Five-year marriage, no children, parties have
similar income and needs: simple equal division of capital assets.
Illustration 2 – One-year marriage, no children, parties have similar income and needs but one party made a substantial contribution towards the purchase of the matrimonial home : each party is returned to the financial position they were in prior to the marriage (a factor which could influence this would be if the other party gave up secure accommodation, for example a council house, to move into the matrimonial home).
Illustration 3 – Fifteen-year marriage, two minor children living with the wife, wife on low income, husband earning £30,000 per annum, only asset the matrimonial home, which has an equity of £100,000: wife needs to remain in the home with the children (assuming she can afford to do so), as there are no equally suitable options for the accommodation of herself and the children. Accordingly, the property is not to be sold until the children finish their education, the wife remarries or cohabits (usually for a minimum of six months, to ensure that her new relationship is permanent), whichever shall occur first. Upon sale, the net proceeds are to be divided as to 75% to the wife and 25% to the husband, in view of the wife’s greater need for capital to re-house herself due to her lower income.
Illustration 4 – Twenty-year marriage, children grown up, net capital assets £300,000, wife earns £20,000 per annum, husband earns £40,000 per annum: wife agrees to settlement whereby she receives £200,000 in return for a ‘clean break’ (see below), i.e. no maintenance for herself.
work due to disability, husband earning £50,000 per annum and living with new partner: husband transfers his entire interest to the wife, for no consideration.
Illustration 6 – Ten-year marriage, no children, no capital assets, wife unemployed and husband earning £50,000 per annum: husband pays £1,000 per month maintenance to the wife for a period of two years to enable her to re-gain her financial independence, thereafter there is a clean break.
Illustration 7 – Assets £500,000, husband contributed £100,000, wife’s needs assessed at £200,000: husband gets his £100,000 back and the balance of the assets are divided equally, so husband gets £300,000 and wife gets £200,000.
Illustration 8 – Assets £500,000, husband contributed £100,000, wife’s needs assessed at £250,000: assets are divided equally, so each party gets £250,000. (Note how needs take precedence over contributions.)