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The Financial Aspects of Divorce and Separation


Resolving the financial aspects of a separation can be complex and it helps to have an understanding of the options available. 

Mediation 

We always try to deal with clients' cases in a way to encourage and to achieve a constructive and amicable resolution of their difficulties. 

To help with this there is a process called mediation. This involves an impartial third person assisting those involved in family breakdown to communicate better with one another and to help them reach their own agreed and informed decisions about some or all of the issues relating to or arising from the separation or divorce including children, finance or property. 

One advantage of reaching an agreement through mediation is that it is almost always considerably cheaper because the matter is not contested through the Courts. Mediation helps you discuss the issues face to face. You can have advice from your solicitor as the mediation process is under way so you can have confidence in the terms of settlement you are discussing. 

An advantage of reaching agreement through mediation is that such agreements usually last and you will usually get on better with your husband/wife in the future. We can provide mediation or we can provide the advice while you attend mediation. There are a number of different organisations which carry out mediation, including the York Family Mediation Service. 

If a husband and wife are able to reach an agreement about the terms of their financial settlement but do not wish to apply to the Court for a divorce, the terms of settlement can be incorporated into a Deed of Separation. This is document which sets out all of the terms of settlement. This document if it is properly drafted by a solicitor can be binding for the future. It is important that you have help from a solicitor with this because failure to do so could lead to the agreement being worthless. 

The Powers of the Court to make Orders 

Husband and wives have rights to make financial claims against each other by applying to the Court for orders for any or all of the following:

  1. Maintenance which is income payments
  2. Adjustment of property ownership such as transfer of a house from joint ownership to the sole ownership of one person.
  3. Lump sums
  4. Pension sharing, which is a transfer of pension fund or benefits into a separate fund for the husband/wife
  5. Pension attachment, which is a payment from a pension fund when the pensioner reaches retirement age

Factors the Court will take into account 

With regard to financial arrangements between husbands and wives, the Court takes various matters into account when considering what Order should be made. The Court considers all the circumstances of the case but gives first consideration to the welfare of any children of the family under the age of 18. The Court must have regard to the following matters:

  1. The income, earning capacity, property and other financial resources which the husband and wife has or is likely to have in the foreseeable future. Including, in the case of earning capacity, any increase in that capacity which it would be, in the opinion of the Court, reasonable to expect a person to take steps to acquire.
  2. The financial needs, obligations and responsibilities which the husband and wife has or is likely to have in the foreseeable future.
  3. The standard of living enjoyed by the family before the breakdown of the marriage.
  4. The ages of the husband and wife and the duration of the marriage.
  5. Any physical or mental disability of the husband or wife.
  6. The contributions which the husband and wife have made or is likely to make in the foreseeable future to the welfare of the family, including any contribution by looking after the home or caring for the family.
  7. The conduct of the husband or wife, if that conduct is such that it would in the opinion of the Court be inequitable to disregard.
  8. The value to the husband and wife of any benefit which the other, because of the divorce, will lose the chance of acquiring (most usually pension provision).

The aim of the Court is to achieve fairness. Often a key factor is the reasonable needs of the husband and the wife. 

Child maintenance 

In most cases, the Courts no longer have power to make orders for child maintenance except by agreement; an application to the Child Support Agency has to be made for child maintenance to be assessed. As a general guide the level of maintenance payable by the parent who is not living with the children will be as follows:

  • 15% of the net income for one child
  • 20% for two children
  • 25% for three or more children

However, these figures can be varied in certain circumstances and you should seek advice from us about how the Child Support Agency calculations will apply to you. The Court can deal with maintenance claims in the following situations:

  1. The other parent lives abroad;
  2. The child has mental or physical disabilities;
  3. The child is 19 or above and is still in full time education;
  4. The claim is for step-children;
  5. The parent without care is wealthy and top-up maintenance can be sought in addition to the Child Support Agency assessment;
  6. A payment is needed for school fees; or
  7. There is already a maintenance order in force.

Maintenance for husbands and wives 

If there is a disparity between the respective incomes of the husband and the wife, the person with the lower income can apply for maintenance from the other. There are no set guidelines for the amount payable. It depends on each party's reasonable income needs and the amount of income available. It is possible to capitalise maintenance payments. This means that the lower earning person gets a greater share of the capital assets in return for a "clean break" settlement. Clean break settlements are dealt with under Ending Financial Claims. 

Dividing Property 

There are various ways of resolving ownership of property when husbands and wives split up depending on the housing needs and other resources of each party.

    1. A sale of the property and a division of the sale proceeds, either equally or unequally.
    2. Transfer of ownership of the property to one person, sometimes in return for an immediate lump sum payment or a future interest in the property protected by a Legal Charge
    3. The property is held on trust by both parties and will be sold at a later date. The parties' respective interests in the value of the property can be adjusted.
    4. Legal Charge is like a mortgage. This is registered against a property which is owned by one person and provides the other person with a financial interest in the house which will be repaid at a later date.The events which usually trigger a payment of a postponed interest in the property are:
    5. The remarriage of the person occupying the property
    6. The person occupying the property cohabits with another person for a period of months
    7. The person occupying the property dies
    8. The person occupying the property voluntarily sells the house
    9. The youngest child reaches 18 or ceases full time education.

Endowment policies can also be dealt with. These can be surrendered or sold, rewritten as sole life policies or the benefit of the policy is transferred to one person. It is important that anyone contemplating a financial settlement, particularly if it involves a mortgage or an endowment policy, should seek good financial advice before agreeing anything with their husband or wife. 

Pensions 

The Court has various powers in relation to dealing with the issue of Pensions. 

The first is known as "off-setting". This means that the Court looks at the transfer value of the pensions and decides that the person without significant pensions should receive a payment in capital from some other source. This is only possible where there is other capital available. 

The second option open the Court is a pension sharing order. This means that an existing pension fund is divided, not necessarily 50-50, and passed over to the other person which will then be invested in a new pension in the other person's name. 

The third option, not often used, is pension attachment, formerly known as "earmarking". The Court has the power to order that a proportion of a pension, once received both as to the annual income and the lump sum, should be paid to the other husband/wife. The Court has the power to order that a proportion of any death in service benefit should be paid to the other husband/wife as well. 

The problem with pension attachment orders is that they are complicated to draft and if the person receiving the attachment order remarries then no continuing annual payment will be made. If someone changes job then that will mean that an order regarding a death in service benefit will be of no effect.This is a highly complicated area of the law and almost every case is different. 

Disposal of Assets 

If a husband/wife has disposed of assets with a view to frustrating the other's claims for a financial settlement or it is suspected they are about to do so, the Court has wide powers to deal with such situations. 

Under section 37 of the Matrimonial Causes Act 1973, the Court can restrain someone from carrying out a transaction or from transferring assets out of the country. In addition, the Court can set aside (ie. unscramble) certain transactions which have already been carried out where they were completed with the intention of defeating a claim for financial settlement arising from a marriage. 

The Court can exercise these powers whilst a financial application is proceeding, or, indeed, in some cases after a financial provision order has been made. However, the Court cannot order a transaction to be set aside if a third party has bought the asset in good faith without knowing the motive behind the sale was to reduce the husband/wife's assets to frustrate financial claims. 

If a transaction took place less than three years before your application, the Court will presume the transaction was completed to frustrate your financial claim unless there is convincing evidence to the contrary. In addition to these powers, the Court also has "inherent" powers to prevent someone trying to defeat financial claims without the requirement that they have to prove an intention to frustrate their husband/wife's or former husband/wife's claim. If you do consider that your husband/wife has acted in this way or that there is a risk that they will do so you should contact us urgently because we will need to act quickly to protect you. 

Death and Joint Property 

When couples own a house normally they would own this as "joint tenants". This means that, if one dies, the survivor will be entitled to the whole property, even if divorce proceedings have been started or they are already divorced, and irrespective of any provision in a Will or, if no Will has been made, irrespective of the intestacy rules.

It is possible to prevent this occurring by preparing a simple document known as a Notice of Severance which you should sign and which must be sent to your husband/wife for signature. Once you have both signed this it will then be lodged at the Land Registry. After the Notice has been sent to your husband/wife, even if they do not sign and return it, the property will then be owned by you both as "tenants in common".

This means that, in the event of you dying before your husband/wife, your share in the property will pass according to the terms of your Will, or under the rules of intestacy if you have no valid Will. In the event of your husband/wife's death their share in the property will pass to their beneficiaries under their Wills or the Intestacy rules. 

Under the rules of intestacy, in the absence of a valid Will, your husband/wife will receive the first £125,000 of all your assets (£200,000 if you have no children). Therefore, in addition, you need to prepare a Will and we can prepare a Will for you. Therefore, in order to ensure that your husband/wife does not become entitled to your share in the property in the event of your death, it will be necessary to prepare a Will and a Notice of Severance. 

Joint Bank accounts

If a joint bank account exists with your husband/wife, you should ensure that the account is made a joint signatory account requiring two signatures for any money to be withdrawn. Otherwise any money in the account can be withdrawn, or an overdraft limit run up without your knowledge or permission and you will be jointly liable for any overdraft run up, even if you have not spent the money yourself. 

In the same way, you should consider cancelling any joint credit cards otherwise you will be similarly liable for any expenditure incurred by the joint holder of the credit card. 

A husband and wife is not liable for the debts of the other if the debts are in the other party's sole name. However, they can be taken into account in the financial settlement because they have often been incurred for the benefit of both parties. 

Retaining Financial Documents 

In matrimonial proceedings both parties have an obligation to make full disclosure of their financial position. This is so, whether there are Court proceedings or not. The documents you will be required to produce include the following

  1. P60 for the last complete tax year;
  2. Documentary evidence of any other assets or debts you may have.
  3. Pension benefit statements and a cash equivalent transfer value of your pension fund;
  4. Mortgage statements for the last year;
  5. Credit card statements for the last 12 months;
  6. Bank and building society statements for the last 12 months;
  7. If you are self-employed you will need to produce your business accounts for at least the last two years, together with the self-assessment forms and your tax computations from the Inland Revenue;
  8. Wage slips for the last 3 months;

Ending the right to make financial claims 

These rights can only be brought to an end in two ways. The first and most usual way is by a Court Order. Where a husband and wife do not wish to proceed with financial claims then, provided the Court agrees that such an Order would be appropriate, an Order can be made dismissing their financial claims. This is often referred to as a "clean break order". 

The second way is where someone obtains a Divorce and then re-marries. In this situation, unless that person has already applied for the Financial Orders which they are seeking by way of formal application before they re-marry, then they are caught in "the re-marriage trap". The effect of this trap is that they have lost the right to make those financial claims against their former husband/wife. Should the husband and wife decide not to obtain Court Orders dealing with financial provision and in the event that the re-marriage trap does not apply, then the claims which each of them have against the other are simply left open.

This situation is unsatisfactory in that it creates a degree of uncertainty because it leaves the possibility of one husband/wife making a claim against the other at any time. On the other hand, where one husband/wife's financial position is likely to improve substantially it may be in the other's interest to delay a final financial settlement. 

Where neither husband/wife wants to claim against the other it is usually better for an application to be made by consent for the respective claims of each person to be dismissed.