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Tax implications of dealing with non-matrimonial property on divorce

Recent cases in the High Court and Court of Appeal have highlighted factors that are considered when dealing with non-matrimonial property on divorce and how the value of such property should be reflected in ancillary relief awards. 

Jones v Jones [ 2011] EWCA Civ 41 

The parties married in 1996 at which time the husband was the sole owner of a company. The company was sold in 2007 when ancillary relief proceedings were underway and the husband received the net sum of £25m. At first instance the Judge found that the net assets of the marriage amounted to £25m and that 60% of the net proceeds of sale of the husband's company (£15m) represented what he had brought to the marriage. The balance of £10m was subjected to the sharing principle and the wife was awarded half that sum. 

The Judge arrived at the figure of £15m in light of the agreed fact that the company was worth only £2m in 1996. This meant that he had placed a significant capital value on the personal earning capacity of the husband to make money in his chosen field as a result of his experience during the 19 years prior to the inception of the company. 

On the wife's appeal Wilson LJ held that the Judge had been wrong to ascribe a capital value to the husband's personal earning capacity at the date of the marriage and to treat that capital as a non-matrimonial asset. Wilson LJ put the value of the company at the date of marriage at £9m (taking into account the company's latent potential and an allowance for passive economic growth between the date of marriage and the date of sale). Accordingly the value of the matrimonial assets was £25m less £9m (£16m) and the wife was awarded half of this sum which was considered to be within the bracket of fairness and sufficient to enable her to meet her needs. 

N v F [2011] EWHC 586 Fam 

The husband came to the marriage with assets worth £2.11m, which were worth £9.71m at the time of the divorce 16 years later. During the marriage the pre-marital property was completely intermingled. Mostyn J reflected the approach adopted in Jones by advocating a two-step approach in the treatment of pre-marital property:

  • the court should first decide whether the existence of pre-marital property should be reflected in the award at all by considering factors such as the duration of the marriage and the extent to which pre-marital and marital property had been intermingled during the marriage. 
  • the court should then determine how much of the pre-marital property should be excluded by reference to the historic value of the property, the value of any uplift or passive growth and the extent to which the property has been mingled.

The remaining marital property should be divided equally between the parties and the final percentage should then be tested against the principle of fairness. 

The Judge excluded £1m from the pot of assets available for sharing and divided the remainder equally, which left the wife with 44.7% of the total assets. He emphasised that, had it not been for the wife's needs in this case, more of the pre-marital assets would have been excluded, possibly even the entirety of the husband's pre-marital wealth. 

K v L [2011] EWCA Civ 550 

The wife owned shares in a family business which had been inherited by her long before the twenty year marriage and had never been intermingled with the matrimonial assets. 

The shares, (worth £300,000 at the time of the marriage, but £57.4m when the couple separated) represented over 95% of the total asset base yet the couple enjoyed a relatively modest lifestyle living in a £300,000 house and spending only £80,000 a year. Neither party had worked, but both had contributed equally towards family life. At first instance the husband was awarded £5m but appealed on the basis that the judge had failed to take into account the sharing principle. 

Dismissing the appeal, Wilson LJ distinguished the facts of  K v L and in particular the lifestyle which the couple had enjoyed and the husband's modest needs from previous decisions in which the sharing principle had been applied to pre-marital assets. The Court of Appeal concluded that the award of £5m generously met the husband's needs and therefore it was unnecessary to go beyond this and award him a significant share of the pre-marital assets.

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