A divorce settlement is an agreement between the couple over how their assets, pension and income will be divided.
What is a Divorce Settlement?
When a married couple divorce it is important that they consider their financial position and how their assets will be divided between them. In many cases, an agreement can be reached between the couple as to how the assets will be divided by attending mediation; direct discussions or negotiations through solicitors. In other cases, however, it may be that an application has to be made to the court whereby the court will ultimately (if an agreement is unable to be reached at any point during the court process) make a decision as to the split of assets.
Essentially, a divorce settlement is the final order reached between a divorcing couple, setting out how they will divide their assets, pension and income.
What are Matrimonial or Non-Matrimonial Assets?
Matrimonial or marital assets are the financial assets that have been built up by the parties during their marriage. This can, of course, also include any debts that have been accrued during the marriage. Although, it is important to note that debts may have been accrued by one party to the marriage and benefitted both parties and it is therefore probable that the court would deem this to be a matrimonial debt.
Matrimonial assets can include the following:-
- The family home;
- Other properties owned jointly or in either of the party’s sole names. It is important to note that if a property is held in one party’s sole name, however, then the treatment of the property during the marriage will be key to establishing whether it is to be deemed as matrimonial or non-matrimonial;
- Pensions – generally this includes the pensions that have been built up during the marriage;
- Savings;
- Current accounts / cash in the bank;
- Business assets.
Non-matrimonial assets are generally the financial assets, or indeed debts, which were either acquired before the couple were married or after their separation. Sometimes it may be suggested that assets that have been kept separate from matrimonial assets during the marriage should be treated as non-matrimonial assets. Any of the above listed assets could be argued to be non-matrimonial assets depending on how, when and why they were acquired.
The key is that whether an asset is matrimonial or non-matrimonial is fact specific.
Will Non-Matrimonial Assets Always be Excluded from a Divorce Settlement?
The simple answer to this is no.
During the financial remedy process the couple will usually exchange financial disclosure by way of Forms E (although, note, in some cases the couple may be comfortable to reach an agreement without such financial disclosure, although this is rarely advisable). Within the Form E document the couple each have a duty to provide full and frank financial disclosure. This therefore includes all financial assets and liabilities which they have an interest in, regardless of whether they are then going to be argued to be matrimonial or non-matrimonial.
When the court considers a financial settlement then they will have review the factors as set out within Section 25 of the Matrimonial Causes Act 1973. One of the most important factors is each person’s respective needs. For example, therefore, if needs dictate that non-matrimonial assets need to be used to meet needs then it is possible for the Court to do so. This is specifically relevant with an inheritance for example – the court will seek to leave the inheritance with the person who has received the same but if the other person’s needs dictate that that inheritance will need to be utilised then the court will generally do so.
It is also possible that non-matrimonial assets can be converted into matrimonial assets. For example, in the case of an inheritance then they are naturally non-matrimonial as usually any inheritance will be paid exclusively to one person in accordance with a Will. However, if that inheritance is then transferred to a joint account or utilised in any way to benefit both spouses then it would be deemed that that non-matrimonial asset has been converted into a matrimonial asset.
Business Assets and Divorce
The court is able to take into account the value of any business interests held by either spouse – this can include sole traders, partnerships and shares in limited companies. The value of a business can be critical and in cases where the business will be retained then it will usually need to be valued by a forensic accountant. The standard procedure is that an accountant will be identified by the parties and instructed to prepare a valuation basis on a joint basis. It is important that any such valuation is independent and that both persons agree to the instruction in the first instance.
How the court will treat business interests will be dependent upon what other assets are available for distribution and it will be fact specific. It is unlikely, however, that the court would order that a business should be sold and instead it is more likely that one person (usually the business owner) will retain the business interests and the other person will receive other assets e.g. more available capital, instead.
Pensions and Divorce
Pensions are another important asset which will be taken into account in almost every divorce. Pensions are valued on the basis of their Cash Equivalent Transfer Value (CETV). A pension share is usually relevant whereby there is a significant disparity in the couple’s respective pension provisions.
There are various options available to a divorcing couple when considering pensions in a divorce settlement:-
- Offsetting
Essentially, offsetting means that there will be no pension share. This is usually achieved by the person with the lesser pension provision retaining a greater share of the other assets available. This is usually relevant in cases where it is important that one person receives more of the capital and they are content, therefore, to waiver their pension share claims so as to receive more of the liquid funds available now.
It is difficult, however, to calculate with precision what any offsetting figure should be as the value of a pension should not be taken to be comparable to the value of a house for example. They are completely different assets and cannot be valued in the same way. It is usually important, therefore, for a pension actuary to be instructed to prepare an expert report to consider any offsetting calculations. A family lawyer can help you to instruct an actuary to provide this advice.
- Pension Sharing Order
This is where a percentage of one person’s pension will be transferred to the other person in a fund in their own name. It is generally advisable to seek an expert opinion from an actuary as to the percentage share of any pension.
The Section 25 Factors
The starting point is usually for matrimonial assets to be divided equally. However, the court is under a duty to consider all of the circumstances of the case and in particular the Section 25 factors. These factors will then need to be applied to the individual case. Having considered the Section 25 factors then it is possible for the court to make an order whereby there is an unequal division of the assets.
The Section 25 factors are as follows:-
- The welfare of the children;
- Financial needs, obligations and responsibilities which each of the parties to the marriage has or is likely to have in the foreseeable future;
- Income, earning capacity, property and other financial resources which each of the parties to the marriage has or is likely to have in the foreseeable future;
- The standard of living enjoyed by the family before the breakdown of the marriage;
- The age of each party to the marriage and the duration of the marriage;
- Any physical or mental disability of either of the parties to the marriage;
- The contributions which each of the parties has made or is likely to make in the foreseeable future;
- The value to each of the parties to the marriage of any benefit which by reason of the dissolution of the marriage that party will lose any chance of acquiring;
- The conduct of each of the parties if that conduct is such that in the opinion of the Court it would be inequitable to disregard it.
What is the Process of Obtaining a Divorce Settlement?
Again, this is entirely case specific, and it depends upon whether the couple are able to reach an agreement directly / through solicitor negotiations or whether an application to court will need to be made for the court to make a determination. In either scenario, it is important that any financial settlement is recorded in a legally binding court order.
If an agreement is capable of being reached between the couple, then a consent order will need to be drafted and lodged at court. This can only be done, however, once decree nisi has been pronounced and so it is important that there are ongoing divorce proceedings in the background to any financial settlement negotiations / discussions.
When lodging a consent order at court then the court will require a statement of information to be completed. This is essentially a snapshot of the parties’ respective financial positions and sets out brief information with regard to the agreement reached. This will therefore enable the court to consider the agreement reached in light of the facts of the case and whilst considering the Section 25 factors.
In the vast majority of cases the court will approve the consent order on a paper and a sealed (or approved) order will be sent to the couple. This will conclude matters. However, there are some cases whereby the court may seek further information from the couple and list what is known as a mention hearing. This may be relevant in cases whereby one person is unrepresented or where the court requires further information / explanation as to how the agreement has been reached or how it will work in practice.
On the other hand then there are situations whereby negotiations break down between the parties and an application to court has to be made for the court to determine what is a fair divorce settlement. The court process can be quite lengthy, and the standard process is that it will include three hearings: a first appointment; a financial dispute resolution hearing (“FDR”) and a final hearing. In most cases, however, matters are able to be compromised at or shortly after the FDR hearing. If a final hearing is required, then the court will make a decision as to the financial settlement. The court process is, however, geared up to encourage parties to work together in reaching a financial settlement and it is only if that isn’t possible that a final hearing will be listed.
The other option available is that of arbitration. Arbitration is a non-court alternative method for resolving disputes, where an arbitrator or panel of arbitrators is appointed by the couple, on a joint basis, to make a binding decision. Arbitration may either be ad hoc (where the couple determine whatever rules they may consider appropriate for the arbitration) or administered (where the arbitration is conducted under one of the arbitral organisations). Please see more information in relation to the arbitration process.
Will the Reason for the Divorce Affect the Divorce Settlement?
At present, the law requires the petitioner (i.e. the person who is initiating divorce proceedings) to establish that the marriage has broken down irretrievably by utilising one of five facts. Two of the five facts – unreasonable behaviour and adultery – are ‘blame’ facts. (Note: the law is, however, changing and there will be no fault divorce as from 6 April 2022).
There is a common misconception that the reasons stated within a divorce petition based upon unreasonable behaviour or adultery will affect the divorce settlement. This isn’t necessarily the case. Whilst ‘conduct’ is one of the Section 25 factors, it will only be relevant, and therefore considered by the court, when it is serious. If one person has committed adultery, for example, this is likely to be extremely upsetting for their spouse, however it is rarely considered to be relevant to the split of the assets.
Will a Pre-Nuptial Agreement Affect the Divorce Settlement?
A pre-nuptial agreement will most certainly be a relevant factor taken into consideration by the court when determining a divorce settlement.
It is important to note that pre-nuptial agreements are not automatically legally binding in England and Wales. However, a pre-nuptial agreement usually will afford a measure of protection.
A couple who enter into a pre-nuptial agreement cannot override the court’s broad discretion to decide how to redistribute their assets and income following the breakdown of the marriage.
To increase the likelihood of a pre-nuptial agreement being upheld there are several “recommendations” that should be followed. If these recommendations are all satisfied, the court will generally attach significant weight to a pre-nuptial agreement and it will be upheld unless there is good reason for it not to.
If a couple wish to challenge the provision set out in a pre-nuptial agreement at the time of a later divorce when considering such an application for financial remedy the court must give appropriate weight to a pre-nuptial agreement as a relevant circumstance of the case when considering the factors set out in Section 25.
Summary
In England and Wales the court has extremely wide discretion when determining how to share assets between a divorcing couple. It is important, therefore, that specialist advice from a family lawyer is obtained at the earliest opportunity.
If you would like more information on divorce financial settlements, please contact a member of our Family Law team.
