Ancillary Relief
Reaching a financial settlement
Ancillary Relief is the legal term used to describe the financial settlement made to each party when a marriage ends in divorce or nullification. As you may imagine, this can be a difficult and even combative part of the breakdown of a relationship, and coming to an agreement is sometimes not easy. Every case is different, and they can range from the relatively simple to the highly complex. They can involve shared assets, such as properties, savings, investments, pension funds and businesses, and obligations such as the payment of maintenance and the provision for children.
In general,the split should be fair, there should be no discrimination between husband and wife, or between the money-earner and the home-maker.
Financial Settlements and the Law
The law governing the Courts’ approach (and therefore the approach of solicitors advising and negotiating on behalf of clients) to financial settlements on divorce is based on the Matrimonial Causes Act 1973.
Personal behaviour is not considered on the basis of morality or emotional impact in financial proceedings. Infidelity or domestic violence is only taken into to account if it has a financial impact. Examples include disabling one of the parties and so reducing their future earning ability, or deliberately running up debts so as to prevent the other spouse from receiving their share of the matrimonial finances.
The aim of the law is to arrive at “fairness”. Although a starting point may be 50:50 the overall situation of the parties may mean a departure from equality in certain circumstances. For example, consideration is given to the facts in each case, including:
- age of the parties (including life expectancy of each party in respect of future income) and length of the marriage
- contribution both in financial and other ways (including bringing up children and inheritance)
- resources and needs of the parties
- standard of living during the marriage
If there are children, the first consideration is their welfare, including their housing needs, and this may impact on the overall financial settlement.
The court must ask itself whether these are fair and do not discriminate against one party bearing in mind all the circumstances.
An Example
Recently a woman appealed to the Court of Appeal regarding the orders for ancillary relief made for her benefit following her separation from her husband. The couple had married in 1992 and had a child that year. They separated twelve years later. The wife had inherited a substantial sum which the couple lived off without working for the first five years of their marriage. In 1997 they used her capital to set up a car wash business, which the husband ran, paying a below-market rent to his wife.
When they separated, the couple’s assets were valued at a little under £1.4 million, which included the car wash business. The judge concluded that the yardstick of equality was applicable to the division of the assets and ordered the transfer of the building housing the car wash to the husband.
In the Court of Appeal, it was held that the assumption of equality of division of assets could be departed from. The assets had been disproportionately brought into the marriage by the wife. Whilst it made sense that the ex-husband should be able to continue in business, this did not mean that the property he rented should be transferred to him.
The court therefore concluded that the ex-husband should be allowed to continue to occupy the premises, paying rent at half the market rate, and that on the sale of the premises, the money received should be divided equally.
Each case is dealt with on its own facts, but then precedented cases are also taken into account.
SOME ISSUES
Maintenance
Since 1984, the courts been required to assess whether the financial relationship between the parties can be terminated immediately. This can be done in a number of ways, not least by the payment of a capital sum in lieu of maintenance and/or by the imposition of a “clean break” order, which has the effect of barring a litigant from making any further claim for any form of ancillary relief.
Maintenance orders can be given on nominal or specific terms. Nominal terms are intended to keep the applicant’s rights to get maintenance alive while the former partner isn’t able to pay. The order can be reviewed any time to match the ongoing changes in financial capacity of the parties.
Nominal orders operate on the basis that if the court makes no order for maintenance (known as “periodical payments”) at the time of the final order, it cannot later come back and make an order. If, on the other hand, it makes an order, it can later vary it. This is why an order for periodical payments at the usual rate of 5 pence per year is known as a nominal order - it gives the recipient the right to come back and make an application for a substantive monthly sum at a later date. We can advise you as to the best course to pursue.
Child Support
This is often covered by maintenance agreements but can involve extra payments for school fees, holidays or medical treatment for children with special needs. Again it is well worth taking advice and sorting this out as much as possible when drawing up a financial agreement.
Property
Many people own residential property and when the time comes to make financial arrangements either at divorce or separation, there are a number of property related aspects that need to be addressed. Whilst this sheet does not deal with the appropriate division of jointly owned property, for which you need specialist advice, it does look at some practical steps.
- If you own the property jointly with your husband/wife or partner (if you are not married) you should check if you own it as joint tenants or as tenants in common. If as joint tenants, then if one of you dies the other will inherit the property automatically. If as tenants in common, then you may leave your share in the property (presumed to be half unless specified to be a different proportion) to someone other than the other owner. Tenants in common may have chosen this form of ownership to reflect different contributions. If only one of you is on the title deeds, when the relationship breaks down, the other person may well want their rights of occupation or potential claims to the property to be recognised, and may register a notice at the Land Registry.
- If you own as joint tenants and want to convert to a tenancy in common (perhaps to prevent your spouse from automatically inheriting should you die before a settlement in finalised), then you must serve a notice of severance on the other joint owner. After the notice has been received, a copy should be kept with your property records.
- One of the ways to deal with jointly owned property is to sell it. You should make sure that the conveyancing solicitor knows exactly what to do with the money (after repaying the mortgage and any selling costs). Usually it is held until agreement is reached on the division.
- Or one of you could buy the other out. If that is what you decide to do, and can afford the extra borrowing, the buyer’s solicitor can usually deal with the conveyancing for you. Don’t forget that Stamp Duty (under Stamp Duty Land Tax) may be payable, but if the transfer is part of a court order (either on divorce or on separation), then the transfer is exempt.
- Finally, don’t forget to review your will as your assets will have changed.
Family business
Upon the breakdown of a relationship, the parties also need to dissolve any partnership or business if an agreement cannot be reached, either if the business is owned jointly or where one of you owns or has an interest in a family business, the value of the business interest and what will happen to it will be a vital ingredient in any divorce settlement.
The court is now more likely to make an Order which may result in the need to either restructure the business or in some cases, sell it to put into effect the terms of any settlement. The Court’s primary function in relation to business and business assets consists of ascertaining the value of the business or business interest, then considering how the value of that interest should affect any settlement.
The main alternative business structures and valuation consist of the following:
Limited Liability Company
Valuation issues will normally be determined by the joint instruction by the parties of a specialist forensic accountant. The valuation process is designed to determine the price a purchaser would be willing to offer for the business or a particular interest in it.
Partnership
Similar considerations apply in valuing a partnership or partnership interest, but the position of other business partners and the terms of any partnership agreement which may exist, will also need to be considered. The valuation exercise will also look at the question of whether values should be ascribed to goodwill and often this is an area of some debate.
Sole trader
In certain cases the business of a sole trader might not be ascribed a value over and above the earning potential of the person running it, but this is not always the case. Where a sole trader is perhaps running several businesses or where a sole trader has other employees or contractors working for them, then the business may be ascribed a value on the basis that a purchaser might be expected to be able to continue it.
The value of the business interest
The value of the business interest is treated as an asset and will therefore form part of the “pot” when it comes to determining financial provision. Whether the business itself can be used to assist in paying any settlement will depend on the structure of the business and its liquidity.
If there are significant liquid assets and the business is owned exclusively by the family then it may be possible to fund the settlement or part of the settlement from liquid assets in the business. Detailed consideration would need to be given as to how the extraction of liquid assets from the company might affect its ability to successfully operate in the future.
The business might own other investments or liquid assets which could be used. Where there are non family member shareholders consideration would need to be given as to how they might be protected after any restructure.
Other possible ways of the business being used to raise all or part of the settlement might include a company purchasing its own shares, the repayment by the company of any loans to it by family members, commercial borrowing by the company, or the company increasing the remuneration paid to one or more family members, either by way of salary or dividends. The potential sale of shares in the business to an outside third party might be a further possibility. Whatever course of action you pursue, the valuation of a business can be contentious and requires careful handling.
An Example
An ex-husband valued the total assets (including the business, which he had run for 33 years) at £4.2 million. His ex-wife placed a valuation on the assets of £7.6 million, valuing the business at £5.3 million. She sought 50 per cent of the net assets plus school fees for the children. Her ex-husband offered 42 per cent of the net assets (£1.7 million), although this offer was later reduced.
Both produced expert witnesses to back up their respective valuations of the business, which was the main point of dissent. The experts differed, but the main point of contention was whether the valuation should be based on a multiple of six times ‘maintainable earnings’ or nine times.
The judge adopted a broad brush approach. Since there were insufficient resources for a ‘clean break’ arrangement to be financed, he ordered that the wife should receive £1.45 million plus periodical payments of £60,000 annually, child maintenance of £20,000 per annum and the cost of the school fees.)
Overseas property
A lot of people nowadays own properties overseas. These people may be relatively wealthy and will have considered carefully the relevant issues as regards the impact of taxation, especially UK Inheritance Tax (IHT), when considering their wills.
However, you should ask yourselves this question. Have you considered the impact of foreign inheritance laws and taxes? Many purchasers look at writing a foreign will as an unnecessary expense. Whilst it is sometimes true that writing a will in the country in which you own property may not be necessary, it is more often than not a good precaution, for several reasons.
Firstly, in the UK your estate will pass to your beneficiaries indirectly, via an executor. In most European countries, however, the estate passes directly to the beneficiaries. This can cause problems if the country has an IHT regime which taxes transfers to non-relatives (which might include your executor) at a higher rate than transfers to relatives. The initial transfer of title to your executor may lead to the imposition of an otherwise avoidable and/or higher tax charge on the estate or at best unnecessary legal fees to sort the problem out.
Secondly if a foreign will is not prepared, it may cause a great deal of extra work in preparing, notarising and translating the necessary documents. This can also cause substantial delay in dealing with the property in the estate. This can of itself cause problems, as in some countries failure to pay the taxes due on death within quite tight time limits can lead to fines.
Please note that the laws and taxes vary from country to country, and you will need to do your research carefully to ascertain what is required. It is important that your UK executor knows that you have a foreign property and a foreign will. If you are domiciled in the UK when you die, IHT will be levied on the value of your worldwide assets. Most UK citizens will be UK domiciled on death no matter where they are resident. The submission of an incorrect IHT account can lead to big tax penalties being levied if errors are discovered at a later date, especially if it looks like IHT evasion was on the agenda.
A new UK will which revokes all former wills may render your foreign will void. This could lead to your estate being distributed in a way which is quite contrary to your wishes.
There are other issues which may crop up, and we can help and advise you on the drawing up of a foreign will.
How we can help
It is sensibly advised that the division of finances on divorce should usually be by agreement between solicitors, endorsed in a Court Order rather than following an expensive and possibly protracted Court Hearing.
Our Family and Relationships Team has a great deal of experience in achieving agreement on fair and workable financial settlements. We are very aware of the complexities and the emotional turmoil that can be involved, and aim to provide both a sympathetic ear and a guiding hand. Our approach is as always, aimed at resolving the issues and reaching an agreement, but we are well prepared to take a tough line if reasonable terms cannot be agreed.
Please contact us at familyandrelationships@glazerdelmar.com if you would like more information about making an application for Ancillary Relief.