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Wealth inherited pre-marriage, and wealth derived from pre-marriage business, treated differently by Court of Appeal on divorce- 27/01/2012
Spouses who inherited wealth or set up their business before their marriage should consider two Court of Appeal decisions on whether and how such assets are to be treated when dividing up assets on divorce.
In one case a husband had inherited £22m before marrying. He and his wife lived off the capital, enjoying an extravagant lifestyle. On their divorce, after 22 years, the wife was awarded just under one third of the remaining value of the wealth.
Normally the court will exclude wealth inherited by one spouse before the marriage when considering what to award the other spouse in a divorce settlement, but then aims for a 50:50 split of the rest. But, in this case, the court took into account that the £22m, although inherited before the marriage, was not treated as a separate resource during the marriage, to be looked after by the spouse who had inherited it. Instead, it was treated as a joint resource for both spouses to spend freely. The court therefore included some of it in its calculations, and awarded the wife one third of it, being the amount it considered sufficient for her to meet her ongoing needs.
In the second case, a husband had a business that had been running for 10 years before his marriage. At the time of the marriage it was worth £2m. At the time of the divorce, ten years later in 2006, it was valued at £3m, but was sold in 2008 for £25m.
The Court of Appeal decided:
- The matrimonial assets should first be divided into two ‘pots’ – one being a non-matrimonial pot and the other a matrimonial pot. These should be divided between the spouses fairly, taking all the circumstances into account.
- On that basis, the wife should have no share of the non-matrimonial pot, but an equal share of the matrimonial pot.
- The non-matrimonial pot should contain the value of the business at the date of the marriage - £2m. However, that value should be adjusted:
- o First, to take account of the 'latent potential' or latent value in the business – effectively, its potential, at the date of the marriage, to generate further value in subsequent years. The court therefore adjusted the value upwards to £4m.
- o Second, to include an allowance for the ‘passive economic growth’ of the business during the marriage. The court indexed the £4m up to £9m on this basis.
- The value of the business at the beginning of the marriage for these purposes, and therefore the amount of the non-matrimonial pot, was £9m.
- Given that the non-matrimonial pot was £9m, but the business was sold for £25m, the matrimonial pot was therefore £16m, which was the difference between the two.
- The wife was entitled to half of the matrimonial pot, but none of the non-matrimonial pot. She was therefore entitled to £8m.
- As a cross-check, the sum of £8m was, in the court’s view, instinctively fair, as it amounted to 32 per cent of the total assets involved.
Recommendation
- Divorcing spouses should take into account that:
- o Assets inherited before a marriage, and wealth derived from a business set up before a marriage are likely to be treated differently by the courts.
- o The more pre-inherited assets are used by spouses as part of their joint matrimonial ‘pot’, available to both to spend, the more likely the court will take them into account when making a divorce settlement.
- o An increase in value of a pre-owned business during a marriage will be taken into account by a court, but its value is likely to be adjusted upwards, to the benefit of the business owner, when calculating the division.
- Specialist advice is strongly recommended.
Case ref: Robson v Robson [2010] EWCA Civ 1171
Jones v Jones [2011] EWCA Civ 41
For further guidance on all matters relating to separation and divorce, please contact a member of our Family Team.