First published on FTAdviser on 8 January 2024.
On divorce, even if a couple wishes to settle their finances by agreement, it is important to know how a court would divide their finances. This is because all financial settlements on divorce are negotiated against the backdrop of potential litigation. The parties will have to obtain a final financial order from the court, and the court will only approve the agreement reached without further enquiry if it is within the realms of what the court itself would order. Clients need to know how much leverage they have in negotiations and make cost-proportionate decisions about when to settle. Clients also need to know that the court has a discretion, so there is no guaranteed outcome. Therefore, family lawyers advise on a bracket of orders that the court could make.
The court will first carry out a computation of the assets and then decide how those assets should be divided. Each party must disclose their financial status to the other. The statute that guides the court when deciding the division of finances is the Matrimonial Causes Act 1973 (the MCA), which states that first consideration must be given to the welfare of any minor child of the family. The court will then look at the following factors set out in section 25 of the MCA for each party:
- Their current and likely foreseeable future income, earning capacity, property and other financial resources, including any increase to earning capacity which could be reasonably expected;
- Their current and likely foreseeable future financial needs, obligations and responsibilities;
- The standard of living enjoyed by the family during the marriage;
- The age of each party and the duration of the marriage;
- Any physical or mental disability;
- The contribution each party has made or is likely in the foreseeable future to make, including by looking after the home/caring for the family;
- Their conduct, if that conduct is such that it would in the opinion of the court be inequitable to disregard it;
- The value of any benefit which by reason of the dissolution or annulment of the marriage that party will lose the chance of acquiring.
The weight given to each of these factors will depend on the facts and circumstances of each case, for example:
- Section 25(a) - in relation to earning capacity, if the breadwinner during the marriage now says that s/he does not want to work after the divorce, meaning s/he cannot pay spousal maintenance to their former spouse who needs it, then the court will likely attribute the breadwinning party with an earning capacity. The court will probably say that s/he can earn at the level they were doing so during the marriage (if s/he is in reasonable health and below retirement age).
- Section 25(d) - when the court looks at the duration of the marriage it includes any period of cohabitation leading seamlessly into the marriage. Therefore, if the parties had lived together for four years before the marriage and had been married for six years then the court would consider this to be a 10-year relationship.
- Section 25(f) - the breadwinner and the homemaker are considered to have made equal contributions to the marriage and there are very few cases where one party is deemed to have made a greater contribution than the other. If one party is arguing that s/he made a greater contribution, s/he will have to show that their contribution was wholly exceptional and that it would be inequitable to disregard it. It is a very narrow concept and advice must be sought from specialist counsel before going down this route. It will be particularly difficult to establish an exceptional contribution in a long marriage.
- Section 25(g) – it is extremely unusual for the court to take into account the conduct of one party when making financial awards. As courts do not have time to look at the reasons for the breakdown of the marriage, even physical and emotional abuse are unlikely to be considered. It is possible to ask the court to reimburse one of the spouses if the other has dissipated a significant sum (financial conduct). However, the argument may not succeed, and consideration must be given to whether running such an argument is cost-proportionate.
- Section 25(h) – one benefit that a spouse might lose on divorce is a widow’s or widower’s pension.
Over the years judges in the higher courts have interpreted the section 25 factors. In 2000 in the case of White v White, the House of Lords found that the overriding objective in dividing the parties’ finances must be fairness. Fairness would be judged against the ‘yardstick of equality’ i.e. consideration given to an equalisation of resources. This case established that there would not be a distinction between the breadwinner and the homemaker.
In 2006 in the cases of Miller and McFarlane, the House of Lords found there to be three factors that could guide the court in making an award - needs, compensation and sharing.
- The “sharing” exercise refers to how the parties will share the assets.
- Matrimonial assets have been generated during the marriage, are in the parties’ joint names or have been a matrimonial home i.e. one in which the family have lived during the marriage.
- Non-matrimonial assets are those acquired pre-marriage and, sometimes, post-marriage and inherited assets if they have not been mingled with matrimonial assets and they are not needed to meet the parties’ needs.
The court will start at a point of sharing the matrimonial assets 50/50. If both parties’ needs are met from a 50% share of the matrimonial assets, then non-matrimonial assets can be retained by the party to whom they belong.
- “Needs” - if the parties do not have enough assets to meet their housing and other capital needs then those needs will trump any ‘sharing’ arguments. Non-matrimonial assets may have to be divided to meet needs or one party may get a larger portion of the assets because their mortgage capacity is smaller.
- The strand of “compensation” is rarely argued in court because it is difficult to prove that there has been a relationship-generated disadvantage to one party meaning they should be compensated. The leading case is McFarlane, in which it was found that Mrs McFarlane, who had been a solicitor and had given up her career to raise the parties’ children, ought to be compensated. If successful, compensation might be reflected by the level of maintenance awarded. Again, advice from specialist counsel should be sought before embarking upon this route.
When it comes to maintenance, there are two types: spousal and child. One party may not be able to meet their own income needs after divorce and so may require spousal maintenance. The court will want to ensure that that party can adjust to independence without undue hardship. If that party can work, the court will attribute an earning capacity, but the court is usually quite cautious about how long it will take for that party to build up their earning capacity and what they can realistically earn, particularly if they have to care for children or have had a long break from working to raise children. When assessing the quantum of spousal maintenance, the court will look at what the payee has by way of income e.g. from any benefits, child maintenance and their own income from work. If there is a shortfall in the amount required to meet the payee’s needs, the court may make a spousal maintenance order. This will usually be for a fixed term such as until the children have finished secondary school. If the payee can build up their earning capacity more quickly, then the term of spousal maintenance might be for three to five years. There will be an opportunity for either party to apply to court to vary the quantum and term of maintenance in the future if there is a significant change in circumstances.
The court has a duty to consider if it is possible, at the time of divorce, to capitalise spousal maintenance and so achieve a clean break between the parties. This involves the payer paying a lump sum upfront instead of paying ongoing spousal maintenance. Whilst there might be a discount on the lump sum for paying upfront, consideration should be given to the likelihood of the payee remarrying as this would automatically bring ongoing maintenance to an end.
The court will not make orders about child maintenance unless the paying party earns over £156,000 gross a year as the Child Maintenance Service (CMS) has jurisdiction over the court. Even if the paying party earns this much, the payee will still have to make an application first to the CMS for a child maintenance assessment. If the CMS makes an assessment on this level of income or higher, it is termed a “maximum assessment”. Once the payee has a “maximum assessment”, s/he can ask the court for a ‘top up’ on the level of child maintenance. If the child/ren share their time between their parents exactly equally, the CMS will not be able to make an assessment because neither party is the ‘resident parent’. In this case, because there is no assessment the other party cannot apply to the court for child maintenance. If the payer lives abroad, then the payee can apply straight to court for child maintenance and the CMS does not have jurisdiction.
It is always important to seek specialist legal advice to ensure that any settlement reached is fair and reasonable and capable of being approved by the court.