Many spouses facing divorce are particularly concerned with how the family court will treat assets which have been gifted or inherited. This concern is most pronounced for the landed estate owner. In the absence of a pre-nuptial agreement, the position in law is not straightforward.
The family court’s approach
The family court has complete discretion as to how assets are distributed upon divorce. It can redistribute or order the sale of assets as it sees fit to achieve a ‘fair’ result. This includes property which has been gifted or inherited. In many legal systems, gifted or inherited property is automatically ‘quarantined’ from financial claims on divorce and left with the party who holds it. It is a common misconception that this applies in England too. In fact, the English courts’ primary concern when determining what is fair is not the source of property, but the parties’ financial needs.
The parties’ financial needs comprise their respective needs for housing and income. But needs are not interpreted in the limited way one might expect. The parties’ ‘needs’ are generously interpreted in the light of the standard of living enjoyed during the marriage, the length of the marriage and the parties’ financial resources. So, in most cases involving substantial estates, ‘needs’ means a mortgage free property and an income stream (payable, if possible, by a single lump sum). In our case of Y and Y in 2012 the only asset available after 26 years of marriage was a country estate, which had been in the husband’s family for two generations and was worth £27m. The wife was awarded £8.8m (just under one third of the total). The judge ignored the husband’s plea that an order at that level would force a sale of the estate.
Assets can, and will if necessary, be transferred between the parties or sold in order to meet the parties’ needs, regardless of the source of the asset.
Sharing the matrimonial wealth
The law views marriage as a partnership. If there is more than enough to meet both parties’ needs, the court can order the matrimonial property to be shared between the parties on divorce, on the basis that that is reasonable and fair.
What constitutes matrimonial property? Assets built up during the marriage will be deemed to be matrimonial property and shared.
But assets brought into the marriage by one party or inherited by or gifted to one party during the marriage will be treated differently. The court will not consider those assets to be a fruit of the marital partnership; they are external to the marriage and will be deemed ‘non-matrimonial’. The landed estate which has been in one party’s family for generations is perhaps the paradigm example of non-matrimonial property (but see the warning below). It is very unlikely that non-matrimonial property will be shared unless it is required to meet needs.
So far so good, but then one has to consider whether non-matrimonial property has been ‘mingled’. Non-matrimonial property can become matrimonial as a result of its treatment during the marriage. If it is used to support the parties’ standard of living, then it can become ‘merged or entangled’ with other property. The longer the marriage, the greater the risk of ‘mingling’.
If, for example, one of the parties draws upon an inheritance to fund the purchase of a family home, the family home would invariably be treated by the court as matrimonial property for the purpose of any sharing claim, regardless of whose name the family home is held in. Whereas inheritance which is kept separate in the recipient’s sole name and is not used to fund family expenditure is likely to retain its non-matrimonial character. If one party inherits a painting during the marriage and decides to hang it in the matrimonial home, the painting will be more vulnerable to an argument that it is a matrimonial asset than if it had been kept in a museum or a specialised storage facility.
Protecting non-matrimonial property: nuptial agreements
Nuptial agreements are an effective method of asset protection. Although nuptial agreements are not strictly legally binding, the family court will hold spouses to their terms if they meet certain requirements. Nuptial agreements can therefore be used to ring-fence non-matrimonial property, even when the spouses live in that non-matrimonial property.
The nuptial agreement must have been freely entered into; there can be no suggestion that one party has been pressurised into signing the agreement. In the context of a pre-nuptial agreement the parties will, therefore, need sufficient time before the wedding to consider and negotiate its terms.
The implications of the agreement must be fully appreciated by both parties. The parties must fully understand the other party’s financial position and their own entitlement in the event of a divorce without an agreement in place, so that they understand what they are ‘giving up’ by entering into the agreement.
Finally, it must be fair to hold the parties to the agreement in the circumstances prevailing at the time of their divorce. So, as a minimum, the agreement must meet the needs of the weaker financial party.
Mr Justice Munby suggested in P and P in 2004 that a “pecuniary legacy that accrues during the marriage” should be treated differently to “a landed estate that has been within one spouse’s family for generations and has been brought into the marriage with an expectation that it will be retained in specie for future generations”. However, six years later in D and D, Mr Justice Charles said that there was no special rule “simply because the relevant assets are, or derive from, gifted or inherited farms or farming assets (or estates)”. The position in law is not therefore straightforward. Judges want to preserve their right to give different weight to non-matrimonial property, on a case-by-case basis, in their overall task of creating a ‘fair outcome’.
The best advice for the landed estate owner is to enter into a pre-nuptial agreement so that the source of property and its intended treatment is considered before and during a marriage, not just at the point at which it ends.
If you require further information about anything covered in this briefing, please contact Flora Harragin or your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, April 2021