Category: Divorce

As we head ever closer to the end of the current tax year, it is vital that all divorcing and separating couples seek professional advice if they are considering a transfer of assets.

For most divorcing couples, tax issues are way down on the list of things to be considered, however, the impact of the tax on the eventual settlement should never be underestimated.  By carefully planning the settlement, it should be possible to minimize the tax cost of any transfers between the parties, thus leaving the maximum amount possible for distribution.

Whilst the impact of both income and inheritance tax must be considered, there is no immediate charge under either tax upon the transfer of assets under a divorce settlement.  However, there are immediate Capital Gains Tax (‘CGT’) implications.

Spouses are treated as ‘connected parties’ for most purposes in CGT, and this remains the case throughout any period of separation or divorce proceedings until Decree Absolute is pronounced.  The basic rule is that up to and including the tax year of permanent separation, the transfer of assets between spouses (eg shares in the family business, investments or property) takes place on a “no gain, no loss” basis because they are ‘connected’.  Hence, there is no immediate CGT liability arising on either the transferee or transferor.

However, gains arising on any asset transfers made following the tax year of separation but before Decree Absolute are assessed on the transferor spouse. Therefore, wherever possible, a transfer of assets between spouses, particularly those assets where a CGT liability may arise, should be made before the end of the tax year in which separation takes place.  

For those couples who do not separate until after 6 April in any year, they will have up to twelve months to arrange their tax affairs in the most efficient way.  However, the tax current tax year ends in just under eight weeks so, for those who have already separated, the opportunity to make the best use of the “no gain, no loss” rule is fast disappearing.  

It is worth remembering that post Decree Absolute, former spouses are no longer treated as ‘connected’ and transfers between them are no longer deemed to take place at market value.  Gains (or losses) in that scenario are then calculated based on actual consideration received.

Professional advice on this matter should be sought by all divorcing or separating couples as soon as possible.

Suzanne Grant is a member of the firm’s forensic team and has many years of expertise in advising on complicated financial matters arising upon divorce and separation.  She can be contacted at our Harrogate office on 01423 532600.

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In this instalment of Stowe guests, we are joined by James Harris of J P Mortgages

J P Mortgages is a whole of market independent mortgage brokers so clients can be confident that they will find the best the best mortgage deal available.

Today, James offers his expert advice on mortgage options when you are separating or getting a divorce

Divorce and separation can be a very stressful event. In the midst of all of this, you may ask: Where am I going to live?

Whilst things were going well, you may have bought a house with your partner and you may want to continue to live in that house – especially if you have children. But what do you do about your mortgage?

In an ideal world, you might keep your mortgage, or re-mortgage to get a better deal, whilst getting the house and the mortgage in your sole name. This is referred to as a Transfer of Equity – one person agrees to come off the property title, typically as part of a larger agreement, or in return for a sum of money. From then on, you would be the sole owner of your property. So, what’s stopping you?

Firstly, you’ll need to negotiate with the other party to the mortgage, possibly via your solicitor: Will they agree to come off the mortgage? How much money do they want for their share of the property? Will this affect any other agreements (i.e. maintenance payments). Speak to your solicitor about this before making an agreement. As part of these discussions you should determine how much you can borrow – after all, if no financial institution will lend you enough to take over the mortgage on one income, this will affect what you plan to do.

Once you have reached an agreement, you will need to get your mortgage sorted. This will take time, and there may be additional fees involved; taking someone’s name off a property requires a solicitor – and the solicitor representing you in your separation may not be able to act for you.

When applying for a mortgage, you may encounter some difficulties; the first of these is affordability. A joint mortgage underwritten on two incomes, may not pass the lender’s affordability test with just one income – even if you’re not asking for any more money, and even if you have been paying it on your own for some time.

The other big problem that some people have is credit scoring. Prior to separating, you may have had money worries, or built up big credit card balances, or perhaps you’ve kept your finances in good order whilst your partner has not. By taking a joint credit agreement (such as a mortgage) you’ve linked your credit files held by the Credit Reference Agencies, so even if you’ve kept your accounts in perfect order, if your credit file is linked to another file with a low score, this will drag your score down.

Credit scoring is a complex topic, but the key point is that it will take a long time to repair the damage done to your credit score – years perhaps. So if you’re re-mortgaging whilst separating, you will have to do so with your current credit file.

So how are you to solve these problems? Well, as a Mortgage Broker who has been giving mortgage advice for 7 years, I’d say: see a Mortgage Broker. If you’re not sure how to find one, or which is the right broker to use, talk to your solicitor – they will have had contact with Mortgage Brokers who have helped people in a similar situation to yourself and can recommend those who have helped their clients in the past.

There are over 300 mortgage lenders in the UK, and there is a huge difference in their rates, terms, and most importantly, their lending criteria: many lenders will not lend a mortgage that is more than 4.5 times your gross income (salary multiple), others may lend up to 6 times, or will use strict affordability instead of a salary multiple cap; many lenders have very low tolerance for missed credit card payments and defaults, others will lend to those with County Court Judgements, debt management plans, individual voluntary arrangements and even historic bankruptcies; some will use only the basic salary of the full-time permanently employed, others will lend to the self-employed, contractors, people on zero hour contracts and use overtime and bonuses to calculate if the mortgage is affordable. These are just some of the hundreds of things a lender will consider when they look at your application.

Every lender has a little box they like to fit their clients into – if you don’t fit into that box, they will not lend to you. An Independent Broker has access to lenders you’ve never heard of, a good broker can easily match you to a lender who is going to get you the mortgage you need, without you needing to spend days and weeks talking to every bank on the high street yourself.

In summary, sorting your finances out is just part of separating from your partner, and your mortgage is a big part of that. Obtaining a mortgage whilst going through a divorce can be complex and difficult, engaging the services of a professional as early as possible, can save you a lot of time, money and stress.

I’ve helped dozens of people in this situation during my career. Let’s look at the common thoughts of people in your situation.

Am I going to be on a very high rate?

That depends very much on your personal circumstances. A broker would first look at a high street lender to get you the best rates, if possible.  However, if your financial circumstances are not ideal, he may need to look at other options. If, for example, your credit history is in poor shape, he may need to put you with a higher-rate lender for several years, before arranging a re-mortgage to another lender after your credit file has recovered. Many lenders only look back a set time (24 months, 48 months etc) for any missed payments, defaults or other issues. So, after paying a higher rate for a few years, there may be much better options available to you.

I’ll just keep my current mortgage – I don’t need to borrow extra money.

If this is possible, it may be the best solution. However, even if the lender is not lending you any extra money, from their point of view, this reduces the security of their loan – they’ll go from having 2 people with separate incomes they can chase for the monthly payment, to only having 1. If you can meet all their lending criteria, they’ll almost certainly agree, but if you can’t (and it may take a long time to get a definite answer), then they won’t agree to it.

I don’t want to pay a broker to find a mortgage – I’d rather do it myself.

I wish you the best of luck! I say that with utmost sincerity; I’ve been a mortgage broker for years, and I’m constantly learning and sometimes asking other brokers for ideas with complex cases. I regularly attend workshops run by the lender’s representatives to keep up to date on their constantly changing criteria.

Ultimately, it’s a matter of time and money; A broker might need only 2-3 hours of your time during the whole process, and you could have your new mortgage in place in a matter of weeks. To research lenders and personally handle the application on your own, could take hundreds of hours – if you’re spending 2 hours every day on it, you might still be working at it 6 months later.

We’ll just write up an agreement with my partner – I’ll pay the mortgage and stay in the house.

In some cases, this might be the only option available to you. I’d advise talking to your solicitor about the ramifications of this before you finalise any agreement. From a mortgage lenders point of view, these agreements don’t absolve the other person of the mortgage obligation, and credit reference agencies don’t record them.

Or to put it another way; if your partner was the one living in the house and paying the mortgage, and you were moving out but were still named on the mortgage, would you want to buy a new house?

If you do, your credit file still says you’re named on a mortgage; failing to disclose this during an application will almost certainly result in a lender refusing your application. Many lenders will refuse to consider your application for (from their point of view) a second mortgage, those that do consider you, will include the full mortgage as a regular outgoing – even if you are not actually paying it.

Don’t assume everything will go smoothly – always talk to an expert.

Written by

James Harris of J P Mortgages

www.jp-mortgages.co.uk

4 The Crescent Adel, Leeds West Yorkshire LS16 6AA

Tel: 01132 677391 Mobile: 07912754191

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When the news broke the other day that the Lord Chancellor, David Gauke, has confirmed that he will introduce legislation enacting no-fault divorce in the next session of parliament I tweeted a link to the story on Twitter. My tweet received a response suggesting that in the view of the tweeter the introduction of no-fault divorce will change little, save for the timeframes involved in getting divorced. I have heard this before, and suspect that it is a widely-held view. But is it correct?

To answer the question one obviously needs to look at the current law and the proposed new law. A look at the figures for the number of divorces granted per fact proven (I will explain this in a moment if you do not know what ‘fact proven’ means) will also not go amiss.

Let us begin with the current law. There is only one ground for divorce: that the marriage has irretrievably broken down. This will not actually change under the government’s proposals for reform. However, under the current law it is necessary to demonstrate irretrievable breakdown by proving one of five facts: that the other party has committed adultery and the petitioner finds it intolerable to live with them; that the other party has behaved in such a way that the petitioner cannot reasonably be expected to live with them; that the other party has deserted the petitioner for a continuous period of at least two years immediately preceding the presentation of the petition; that the parties to the marriage have lived apart for a continuous period of at least two years immediately preceding the presentation of the petition and the other party consents to the divorce; or that the parties to the marriage have lived apart for a continuous period of at least five years immediately preceding the presentation of the petition.

Note that fault is only attributable in relation to the first two facts. However, those two facts account for the majority of divorces. The most recent figures available are for 2017. In that year there were a total of 101,337 divorces granted. Of those 58,234 were on the basis of adultery or ‘unreasonable behaviour’, or a combination of both. In other words, some 57 per cent of divorces were fault-based.

There is one more thing to consider before moving to the reform proposals. How long does a divorce actually take? Well, it varies greatly, depending upon many factors, including how quickly the parties deal with the divorce (or how quickly they want to deal with it), and of course how quickly the court/divorce centre deals with it. However, if it is dealt with as quickly as possible I suppose it could go through within three months, although that is very unusual – three to six months is more likely, according to the latest figures. That figure includes a statutory minimum period of six weeks between the decree nisi and the decree absolute.

So it could be said that under the current law a divorce could in theory go through within three months of the ‘moment of breakdown’ if a ‘fault’ fact is proved, assuming that the ‘moment of breakdown’ is when one party decides the marriage is over and they want a divorce. On the other hand, if the only fault provable is five years separation it would take a minimum of five years from the moment of breakdown (assuming the beginning of the separation was the ‘moment of breakdown’ – it may not be) plus three months, i.e. five years and three months.

And what does the government propose?

It proposes that the five ‘facts’ be done away with, i.e. the petitioner will no longer have to prove one of them. A statement by one or both parties that the marriage has irretrievably broken down will suffice. However, the government believes that there should be a minimum timeframe for the divorce “to allow due consideration of the decision to divorce”. To achieve this they suggest that the period between decree nisi and decree absolute be increased to a minimum of six months.

So it could be argued that the reform will change the timeframes involved in divorce. And not just by reducing them, as in desertion and separation cases. For some it may actually take longer to divorce, if the six month ‘period for consideration’ is brought in. Assuming that under the new law it could still be possible to get a decree nisi within a month and a half of issuing proceedings, the minimum time for a divorce could be some seven and a half months, in all cases.

In summary, the minimum time for a divorce under the government’s proposed new system will reduce from five years and three months for a non-consent separation divorce, to just seven and a half months. On the other hand, the minimum in a ‘fault-based’ divorce would actually increase, from three months to seven and a half months.

But all of this is of course missing the main point of no-fault divorce. As we have seen, currently in 57% of cases petitioners are attributing blame for the marriage breakdown on the other party. They are doing this because they don’t want to wait two (or, worse still, five) years before they can issue divorce proceedings. And why should they have to wait?

So in nearly two-thirds of divorces we have the spectacle of blame. OK, in many cases the other party may not be too bothered about being blamed, or about the allegations of their unreasonable behaviour made by the petitioner. But in a lot of cases they will be bothered. This will make them less amenable to resolving other issues by agreement, such as in relation to finances and arrangements for children. It may even make them want to enter into the disaster that is a defended divorce. In both cases (issues not resolved by agreement and defended divorce) long, acrimonious, expensive and stressful contested court proceedings could ensue.

Attributing fault for the breakdown of the marriage can have awful consequences, not just for the parties but also for any children involved. And it is entirely unnecessary. As must now be clear to all, there is no need whatsoever to attribute fault for the breakdown of a marriage. So why not do away with it, and its consequences? That is really what the reforms are about.

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“I perfectly understand, and, indeed, have some sympathy with, the frustration that one party of no, or only relatively modest means must feel when he or she is aware that there is great wealth on the other side of the family, but is unable to tap into it even for the purpose of buying a home.  But this tragic and destructive case should stand as a cautionary tale to those who would embark on expensive litigation which they can ill afford in the hope of prising money from a discretionary trust.  A very careful and cool appraisal needs to be made at the very outset as to how realistic a prospect that really is.”

That quote, from early in the judgment of Mr Justice Holman in the case Daga v Bangur, really encapsulates all I want to say in this post. I think Mr Justice Holman’s point actually applies far more widely than just to cases involving discretionary trusts (i.e. trusts where the trustees have a discretion as to which beneficiaries receive money from the trust fund, how much they receive, and when). It applies to all financial claims on divorce: no matter how strongly you feel about the matter, think carefully about whether your claim is likely to succeed, before rushing off to court.

OK, I suppose I should say just a little bit more about this case. It concerned a husband’s claim for a lump sum payment, or other capital provision, from the wife. At the outset of the hearing before Mr Justice Holman the claim was for a lump sum of £2.5 million, but by the time of his closing submissions, his counsel had moderated that claim to one of the order of £1-1.5 million. The focus or target of the husband’s claim was two discretionary trust funds of which the wife is a beneficiary, and which have combined assets of the equivalent of about £17.5 million sterling. The husband, on the other hand, had debts of about £72,000 (he had savings of about £150,000 at the time of the separation, but they were spent on legal costs), and pension funds of around £220,000.

The parties were married in 2007, and have one child. The marriage broke down in 2016, and the husband issued divorce proceedings in October of that year.

And why did the husband’s claim fail? Quite simply, because Mr Justice Holman found that the trust funds were not an available resource in reliance upon which any award could be made. Further to this, the husband did not demonstrate a need for any substantial capital payment (although for the purpose of this post I will concentrate on the first point, regarding the trusts).

As I said, the two trusts are discretionary, the beneficiaries being members of the wife’s family. Mr Justice Holman found that whatever order he may make, the trustees were highly unlikely to make funds available to benefit the husband. Accordingly, he could not make an order in reliance upon the funds in the trusts, and to treat the wife as having about £20 million plus “available” to her, as the husband’s counsel did, was “frankly, fanciful.”

In the circumstances, the husband’s claims against the wife (and, indeed, the wife’s claims against the husband) were dismissed. In other words, there would be a complete clean break.

But that was not of course the full extent of the matter. As Mr Justice Holman also stated early in his judgment:

“How tragic it is that … the parties have spent or incurred between them over £1 million on legal costs.  Of that figure about £380,000 related to litigation about their son.  But almost £650,000 has been spent litigating over finance.  £650,000 could have made a very large contribution to the purchase cost of the sort of flat the husband now aspires to buy.  As it is, the savings of around £150,000 which the husband had accumulated during the course of the marriage by the time of separation have been wiped out, and each party now has considerable debts.  There are now in this case no liquid matrimonial assets nor any “acquest” at all, but only large debts.”

Ouch. As I said: always think very carefully before you rush off to court.

You can read Mr Justice Holman’s full judgment here.

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Since 2012 parties to financial remedy proceedings have had the option of having the dispute dealt with in arbitration, rather than by the court (arbitration was subsequently extended to include dealing with children disputes). There are a number of reasons why they may choose arbitration, for example that it is quicker than having the court deal with the matter, as we will see in a moment. However, arbitration does, of course, rely on the critical fact that the parties agree to be bound by the arbitrator’s award, as obviously arbitration would be a pointless exercise if the award was not binding. To ensure that the award can be enforced, it is usually made into a court order.

But what if one of the parties is not happy with the arbitrator’s award?

This was the situation in the recent case BC v BG, in which the wife was seeking an order that an arbitral award not be made into a court order.

I don’t need to go into much detail regarding the background facts in BC v BG. Briefly, the parties started cohabiting in 1998, had two children in 2000 and 2001 and married in 2006. They separated in 2016 and the children live with the wife. Divorce proceedings were issued, and the husband made a financial remedies application in November 2016. The application was listed for hearing in February 2018, but the hearing was ineffective because the case could not be accommodated by the court. It was re-listed for the 10^th to the 12^th of July, but that hearing was also ineffective, because the judge was unavailable due to sickness. Not wanting to wait several more months for a new hearing date, the parties agreed to go to arbitration.

The arbitration took place on the 11^th and 12^th of July, and the arbitrator made his final arbitration award on the 2^nd of August. He divided the net capital 60:40 in the wife’s favour (in part because the parties, who both needed to rehouse themselves, had unequal mortgage capacities), awarded maintenance to the wife, and made a pension sharing order (which was in the terms agreed by the parties).

The wife was not happy with the award, and so didn’t want it to be made into a court order. She put forward four arguments in support of her case:

1. That the maintenance award, which was for the maintenance to be reduced over time, meant that she would not be able to raise a mortgage. This was not accepted by the judge – the parties knew that such an award was possible, and in any event it did not necessarily mean that the wife would be unable to raise a mortgage.
2. That the husband had failed to disclose that his pension contributions were voluntary, not obligatory. In relation to this, the judge found that even if the husband had made this disclosure, it was unlikely that the overall outcome would have been materially different.
3. That the arbitrator fell into error in his application of the law, by failing to attach proper weight to a declaration of trust that the parties had entered into prior to the marriage, stating that the former matrimonial home was owned as to 58% by the wife, and 42% by the husband. Without going into the technical detail of this, the judge found that the arbitrator had not fallen into error, as the declaration of trust, which had been entered into five years prior to the marriage, was not a pre-nuptial agreement purporting to deal with the division of the parties’ capital upon the breakdown of their marriage.
4. That the arbitrator fell into error by failing to take into account excessive spending and debts incurred by the husband, as alleged by the wife. The judge did not agree, accepting the arbitrator’s view that these debts did not represent wanton and reckless dissipation of assets by the husband.

In the circumstances the judge held that the wife had failed to satisfy the court that it should not make an order giving effect to the award. The husband was entitled to an order giving effect to the award.

Further to this, and acting as a warning to anyone considering not accepting an arbitral award, the judge made an order that the wife pay the husband’s costs of her application, in addition to her own costs, which amounted to some £21,000.

You can read the full judgment here, and if you require further information regarding arbitration in family cases, see here.

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The general rule as to costs in financial remedy proceedings is that the court will not make an order requiring one party to pay the costs of the other party. The court may, however, depart from this rule where it considers it appropriate to do so on the basis of one party’s conduct before or during the proceedings. Unlike in other types of civil proceedings, there is no rule that the unsuccessful party should pay the successful party’s costs, but one would still expect most costs orders to be made against the unsuccessful party.

That, however, was not the case in Lemmens v Barbara Brouwers, decided by the Court of Appeal last November. Lemmens concerned a husband’s application for the downward variation of a maintenance order. His application was successful (the amount of the maintenance order was reduced, because his financial circumstances had changed), but he was still ordered to pay £30,000 towards the wife’s costs. The husband appealed against this costs order, to the Court of Appeal.

So if the husband won his case, why was the costs order made? The answer is that the judge had found that, right up to the commencement of the hearing, the husband had failed to explain his financial situation to the wife or her advisers. His Form E financial statement was found to be “deliberately misleading”. As a result, the wife incurred significant additional costs, as she sought to understand how the husband justified continuing with his application, despite the fact that his income appeared not to have altered since before the original maintenance order had been made.

The husband advanced two grounds for his appeal. Firstly, that the process was unjust due to serious procedural irregularities, including that the wife filed her Form H costs estimate late, and that the court should not have summarily assessed the costs or his liability for costs, but should have provided for a detailed assessment. Secondly, that the judge’s determination was flawed – he had provided information regarding his finances in a timely fashion, and even if his disclosure was insufficient, the order made by the judge bore no relationship to the actual additional costs caused by this.

Giving the leading judgment of the Court of Appeal Lord Justice Moylan dealt first with the alleged procedural irregularities. He found, quite simply, that the husband had not been prejudiced by the late filing of the wife’s Form H, and that the judge was entitled to decide to assess the costs summarily.

As to the exercise by the judge of his discretion to make the costs order, Lord Justice Moylan found that the judge was clearly entitled to decide that the sum of £30,000 reflected the extent to which the husband’s conduct had increased the wife’s costs. The husband had referred to the effect of his Form E as ‘de minimis’, i.e. too trivial to be taken into account. Lord Justice Moylan disagreed. He said:

“I do not find it surprising that the judge attributed significant weight to the fact that the husband’s Form E was deliberately misleading. This cannot be lightly dismissed as de minimis. Even if, as the husband submits, the inaccuracy was corrected within a relatively short space of time, the failure to give full and frank disclosure at the outset of proceedings can have continuing consequences. The judge further identified that the husband had not provided the wife with a “fully intelligible explanation” until the final hearing. These are findings which the husband cannot sensibly dislodge.”

The judge, he said, had sufficiently explained his summary assessment of the costs. None of the husband’s arguments persuaded him that the judge’s decision had exceeded his discretion. Accordingly, the appeal should be dismissed.

Lord Justice David Richards gave a concurring judgment.

An interesting little case, and a warning to litigants (particularly those who, like the husband in this case, are not legally represented) of the need to provide the court and the other party with full, clear and honest information, in a timely fashion. Here, the husband’s failure to do so turned a ‘victory’ into something more akin to a ‘defeat’.

You can read the full judgment here.

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