SHARING NON-MATRIMONIAL ASSETS

I am often asked by a party in divorce proceedings whether property, valuable goods or an inheritance obtained by one party many years before they met their spouse, “non-marital property” will have to be shared with their spouse on divorce.

What is non-marital  property?

Non-marital property is any asset from outside of the marriage.

This includes any assets, gifts, inheritances acquired by a party before the marriage or after the marriage, and which has not been mingled during the course of the marriage.

Do I have to share non-marital property on divorce?

Once there has been full and frank financial disclosure during divorce proceedings and it can be identified which of the assets are non-marital property, the next step is to consider whether or not there would be enough in the “marital pot” to meet the parties’ needs on divorce.

If there is not, you would then need to determine how much from the non-marital property is required to meet the needs of the party who does not hold the non-marital property.

Non-marital property can be divided if a spouse has financial needs which cannot be satisfied by the assets in the marital pot.

E.G. If a spouse was unable to re-house after the divorce with the marital assets and their housing needs were not satisfied, it may then be necessary to divide non-marital property.

In the case of JL v SL (2015) the Judge, Mostyn J, stated that a claim to share non-marital property (as opposed to having a sum awarded from it to meet needs) would be as “rare as a white leopard”.

In the Law Commission’s report (February 2014) it states that: “The Courts’ approach at present is generally not to make orders requiring former spouses to share property acquired by gift or inheritance, or acquired before marriage or civil partnership, unless that property is required to meet financial needs”.

Therefore, it is very unlikely that non-marital property will be shared unless it can be shown that is required for one of the parties needs.

However in many instances there are insufficient assets and so needs will then take precedence.

The extent to which such “external” assets will be utilised can then be a difficult issue and requires careful consideration.

The High Court case of IX v IY [2018] EWHC 3053 (fam) concerns this issue. This case adds on from the principles set out in the case of Hart v Hart (below). 

S.25 of the Matrimonial Causes Act 1973 gives the Court a very wide discretion in deciding financial remedy cases and the overall goal is that most nebulous of concepts “fairness”.

Since the House of Lords decision in White [2001] 1 AC 596, fairness is to be judged by the yardstick of “equality” and, whilst in theory that is not to be regarded as a presumption or even a starting point, it has nevertheless become something very close to a starting point or, at least, it is when it comes to “matrimonial property”. See Work v Gray [2017] EWCA Civ 270.

It is therefore essential to distinguish between matrimonial property and that which is not but, considering that this is such a basic point, that exercise is not being made easy and nor is the route to that decision nor the consequences.

“Matrimonial property” includes those assets that have come into being during the marriage through the parties’ joint efforts.

“Non-marital property” includes “extra-marital property” which may include gifts and inheritances received by one party during the marriage and, whilst the existence of “non-matrimonial” property has generally been regarded as likely to lead to a departure from equality, there are both very significant caveats to that;  including, if the inheritance (etc) has effectively become matrimonial property by reason of, for instance, the parties’ actions and intentions, intermingling of funds and also differing views on the extent to which the distinction is conclusive.

The concept of “mingling” of funds, passage of time and the family having become accustomed to benefitting from the inheritance (or other potentially non-matrimonial asset) all leading to non-matrimonial assets becoming matrimonial assets is supported by Miller [2006] 1 FLR 1186 HL at paras 25 & 148 and, it has become generally accepted that the parties’ intentions (express or implied) and how they treat the assets over a period of time can have the same effect, so for instance where the inheritance is being used for the benefit of the wife and family it might therefore be implied that the husband intended it to become matrimonial property e.g. N v F [2011] 2 FLR 533 at para 44.

It must follow that a particular asset could be partly marital and partly non-marital.

But, even if it is wholly non-marital , what then?

Since White in 2000 and, despite the Court of Appeal’s decision in Charman [2007] 1 FLR 1246 suggesting otherwise, there has arguably been a move towards the further separating off of “non-marital ” property, either entirely or by applying a different, non-equal, division to it (e.g. Jones v Jones [2011] 1 FLR 1723 & K v L [2011] 2 FLR 980).

According to Mostyn J there are now two schools of thought:

(1) to simply adjust the overall percentage to reflect the existence of non-marital property;

(2) to exclude non-marital property leaving the rest to be divided equally and, Mostyn J prefers the second (e.g. N v F [2011] 2 FLR 533, JL v SL [2015] 2 FLR 1202, & WM v HM [2017] EWFC 25).

Thus, on one view the Court does not ring-fence inherited property at all but treats it as an unmatched contribution and then decides the percentages based on all factors combined but, on the other view, non-marital property is removed from the equation (unless needs clearly demand otherwise).

And just to add to the confusion Hart v Hart is just one of two fairly recent appellate decisions that alter the emphasis somewhat but, not necessarily in entirely the same way. 

In the Privy Council case of Scatliffe v Scatliffe [2016] UKPC 36, Lord Wilson, giving the Opinion of the Judicial Committee on 12/12/16, set out 10 guidance points on this issue at para 25, including:

(vi) That it was contrary to statute for the Court to fail to have regard to non-matrimonial property.

(vii) As per Charman [2007] EWCA 1 FLR 1246, White and Miller had decided that non-marital property was also subject to the sharing principle.

(viii) [But] K v L [2011] 2 FLR 980 pointed out that there had not been a reported decision in which non-marital property had been transferred other than by reference to need.

(ix) Similarly JL v SL [2015] 2 FLR 1202: “rare as a white leopard”.

(x) “So in an ordinary case the proper approach is to apply the sharing principle to the marital property and then to ask whether, in the light of all the matters in S. 25 MCA 1973, the result of so doing represents an appropriate overall disposal.

In particular it should ask whether the principles of need and/or of compensation, best explained in the speech of Lady Hale in the Miller case at paras 137 to 144, require additional adjustment in the form of transfer to one party of further property, even of non-marital property, held by the other.”

In the Court of Appeal, decision of 31/8/17 in Hart v Hart [2017] EWCA Civ 1306, Moylan L.J. gives a very learned and complex judgment where he said: 

“ … the sharing principle applies with force to marital property but does not apply, or applies with significantly less force, to non-marital property.”

“…. Charman …to the extent their property is non-marital , there is likely to be a better reason for departure from equality.”

As of this date there has been no decision where a spouse has been awarded non-marital property by application of the sharing principle. 

The use of the phrase “in the ordinary case” in Scatliffe, above, should be noted. 

When applying the sharing principle the Court will look at whether assets “comprise the product of marital endeavour” and make a factual determination of whether it is marital or non-marital property but, “in my experience it is more nuanced than this as property can be a combination of the two.” 

Miller refers to the lack of a precise boundary between marital and non-marital property and to the importance of the source diminishing over time. 

At several points in the Judgment his Lordship refers, seemingly with approval, to the “mingling” point made above. 

“In my view, the court is not required to adopt a formulaic approach either when determining whether the parties’ wealth comprises both marital and non-marital property or when the court is deciding what award to make.” 

“the concept of property being either marital or non-marital property is a legal construct.

Moreover, it is a construct which is not always capable of clear identification. An asset can, of course, be entirely the former, as in many cases, or entirely the latter, as in K v L.

However, it is also worth repeating that an asset can comprise both, in the sense that it can be partly the product, or reflective, of marital endeavour and partly the product, or reflective, of a source external to the marriage.”

“… with due respect to Mostyn J’s extensive experience in this field, I am not sure there are different schools. In my view, the differences which he identifies are examples of the same principle being applied, but applied in a different manner depending on the circumstances of the case….. The outcome will be the same, namely, when justified, an unequal division of the parties’ property.” 

“The principle which is being applied is that the sharing principle applies with force to marital property and with limited or no force to non-matrimonial property. How should this principle be applied in practice when the existence of non-marital property is being asserted?” 

His Lordship then talks about making case management decisions and the proportionality and nature of a factual investigation, but then returns to the final S. 25 exercise:

“Even if the court has made a factual determination as to the extent of the parties’ wealth which is marital property and that which is not, the court still has to fit this determination into the exercise of the discretion having regard to all the relevant factors in this case. [But] This is not to suggest that, by application of the sharing principle, the court will share non-marital property but the court has an obligation to determine that its proposed award is a fair outcome having regard to all the relevant section 25 factors.” 

“[However] If the court has not been able to make a specific factual demarcation but has come to the conclusion that the parties’ wealth includes an element of non-marital property, the court will also have to fit this determination into the section 25 discretionary exercise. The court will have to decide, adopting Wilson LJ’s formulation of the broad approach in Jones, what award of such lesser percentage than 50% makes fair allowance for the parties’ wealth in part comprising or reflecting the product of non-marital endeavour. In arriving at this determination, the court does not have to apply any particular mathematical or other specific methodology.

The court has a discretion as to how to arrive at a fair division and can simply apply a broad assessment of the division which would affect “overall fairness”.

“Finally, I would repeat that fairness has a broad horizon.” 

It should also be noted that Sharp v Sharp [2017] EWCA Civ 408 was decided, on 13/6/17, shortly before Hart and that Mc Farlane LJ, in a far ranging and fascinating judgment, rejects the view expressed by Singer J at first instance that, without a pre-nuptial agreement, the sharing principle applies to everything and accepts that the “universal assets” in that case were in a separate category not to be subject to equal sharing.

However, in XW v XH [2017] EWFC 76 (21/12/17) Baker J avoided applying the Sharp approach, thought that the distinction between marital and non-marital did not matter, as the latter should not be excluded and, then went on to apply Hart in concluding that it was not proportionate to attempt to draw the distinction, adopting instead a broad assessment approach.

XI v IY [2018] EWHC 3053 (fam) (16/10/18) is a decision of Williams J in which His Lordship recognises the complexity of this area and the “myriad” of applicable cases, suggests that recent Court of Appeal cases allow a more flexible approach but nonetheless focuses on the court identifying assets as wholly or partly “non-marital” and treats them as assets to which “no sharing issue arises”.

Whilst it is right that there are signs in the authorities of a flexible approach (Hart in particular), there also appears to be something of a swing backwards and forwards over whether non-marital property is to be treated separately or not and, particularly in that context, the flexible approach, which may come down to little more than ‘fairness’, makes it even more difficult, not less so, to advise how the court will treat marital assets.

Equally, it certainly remains the case that the dividing line between marital and non-marital property is not settled or easily discerned. All of which, I am afraid, means that this remains an area open to a great deal of argument.

Pre-Nuptial Agreement/Post-Nuptial Agreement to protect Non-Marital property

A pre-nuptial agreement can be entered into prior to the marriage or a post-nuptial agreement following the marriage to protect assets including non-marital property should the marriage ever break down.

Although pre-nuptial and post-nuptial agreements are not strictly legally binding in the UK, in the landmark case of Radmacher v Granatino (2010) the Supreme Court ruled that the Courts must now give appropriate weight to prenuptial agreements.

Provided the correct steps are taken and the parties seek independent legal advice a pre-nuptial or post-nuptial agreement is likely to be upheld on divorce and can provide the necessary protection for parties who wish to preserve non marital assets.

If you need more information on the issues raised in this article or any aspect of Family Law please do not hesitate to contact us for a free consultation. 

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