As the number of people depending on inheritances grows, recent guidance from the Supreme Court has clarified how courts will treat inherited wealth on divorce. Harry Nosworthy, barrister at 4PB, examines the implications of the landmark Standish v Standish ruling and what it means for advisers working with clients whose family wealth is at stake.
Why inheritance matters in divorce cases
Over 23 million UK adults rely on an inheritance, to some extent, with over a quarter of people admitting they will go into debt without it, new data reveals. High net worths are far from exempt from this issue, as many individuals’ wealth portfolios are tightly aligned with their family members. The treatment of an individual’s inheritance on divorce is therefore of considerable importance.
How the courts distinguish matrimonial and non-matrimonial property
On divorce the family court will seek to draw a distinction between ‘matrimonial property’ i.e. wealth that has been the product of the marriage partnership, and ‘non matrimonial property’ i.e. wealth which has come from a source outside of the marriage, such as an inheritance, or wealth that existed prior to the marriage.
The difficulties of categorising wealth in practice
The exercise of differentiating between these two categories of asset is not always a straightforward one, and often there are those assets which fall between the two leaving separating spouses, and often their lawyers, in a state of uncertainty as to what each spouse may be entitled to.
The significance of Standish v Standish
Recently, The Supreme Court in the case of Standish v Standish has sought to provide divorcing spouses with greater clarity as to how the court is likely to distinguish between non matrimonial property and matrimonial property and when property can become ‘matrimonialised’.
Background to the case
The husband in Standish, who was from Australia, enjoyed a successful career in the financial services industry and accumulated significant wealth prior to the marriage. The husband and wife had two children together. The central question in dispute between them was whether the transfer of assets worth c. £80m made by the husband to the wife in 2017 for the purpose of setting up trust to negate inheritance tax for the parties’ children had ‘matrimonalised’ the husband’s non-marital wealth.
Inheritance tax planning as the trigger
The husband had been advised that due to becoming domiciled in the UK if he were to die then his estate would have to pay c. £32m in inheritance tax. The wife however was not domiciled in the UK, and so he was advised to transfer his assets to the wife before he became domiciled in an effort to mitigate inheritance tax the parties’ children would have to pay. The plan thereafter was for the wife to place the assets in discretionary trusts in Jersey. However, at the date of separation the wife had not done so.
How the case was decided through the courts
At first instance the High Court determined that the assets were matrimonial but due to their source the division should be 60/40% in favour of the husband. Both parties appealed to the Court of Appeal and it was determined that 75% of the wealth was non matrimonial and 25% matrimonial. The wife was therefore awarded 50% of the matrimonial assets representing her half share.
The wife’s appeal to the Supreme Court
The wife appealed to The Supreme Court on the basis that too much weight was put on the source of the assets when effectively the assets were gifted to her. The Supreme Court rejected that argument. Their reasons were in summary as follows:
How the Supreme Court defined matrimonial and non-matrimonial property
(i) Non matrimonial property is typically brought in before the marriage, or, is an asset from a source extraneous to the marriage such as an inheritance. Whereas matrimonial property is a product of the parties’ joint endeavours or partnership and is subject to sharing. For the first time the Court made clear that non matrimonial property should not be subject to the principle of sharing but can be subject to the principles of needs and compensation.
The concept of matrimonialisation
(ii) However, the court clarified that what may start as non matrimonial property can become matrimonial property through a process which has been known as ‘matrimonialisation’.
(iii) The previous courts had arguably not clarified with certainty as to how that process has been completed. The Supreme Court explained that ‘matrimonialisation’ rests on the parties over time treating the asset as being shared.
When an inheritance is likely to be treated as shared
Therefore, in the case of an inheritance received by a party during the marriage where the parties intended to use the inheritance for the benefit of the family, and that can be evidenced, then the court is likely to consider such asset to have been matrimonialised and be subject to the sharing principle.
When inherited wealth is more likely to remain separate
Contrary to that position where an inheritance is received late on in a marriage and there was no intention to share that wealth for the benefit of the other spouse or family and the evidence firmly supports that view, then subject to needs being met, there is a strong case that such wealth should be distinguished as non-matrimonial property and not subject to the sharing principle.
The needs principle and exceptions
Of course, in needs cases the court can invade an inheritance, even one received after separation, to meet the other party’s or child’s needs irrespective of whether it is non-marital.
The Supreme Court’s final conclusion
The Supreme Court therefore concluded that none of the 75% of Husband’s assets became matrimonial, principally on the basis that the transfer of the assets to the wife was to save inheritance tax and for the benefit of the children, not the wife. Those assets were not therefore to be considered as being treated as shared between the parties. The remaining 25% was made of matrimonial property.
Key message for divorcing couples
The decision therefore emphasises to divorcing couples that it is evidence of intention to share an inheritance that the court will look for when striving to find a fair outcome.
By Harry Nosworthy, barrister at 4PB