Ella Welsby

A long awaited Supreme Court judgment was published this week and reaffirmed that an asset being in your name on divorce does not automatically mean it will be eligible for division.

Once upon a time a very wealthy man, full-time financier and part-time sheep farmer met his second wife. Both parties had married before and this informed their decision to keep assets separate during the marriage – think a complex financial picture but simple pooled assets: only two joint accounts and a family home in joint names.

In 2017, the parties began thinking about tax planning. Mr Standish wanted to pass his legacy to his children in the most tax efficient manner. This involved confirming to HMRC that he had gifted c.£80 million to Mrs Standish, as she was an Australian non-dom and understood to be exempt from inheritance tax.

Mr Standish had expected Mrs Standish to move the ‘gift’ into trusts for his children but this didn’t happen. The ‘gift’ remained in Mrs Standish’s name until – plot twist – Mrs Standish began divorce proceedings in 2020.

At the first court hearing in 2022 – assets in the matter totalled c.£130m, so the transferred ‘gifted’ funds represented c.62 per cent of all assets. The starting point on divorce in England is a 50/50 division of matrimonial assets i.e. assets built up from cohabitation (not from the wedding date – provided the parties moved seamlessly from living together to walking down the aisle with no break ups/move outs) to separation. The c.£80m gift had been built up by Mr Standish before the parties began cohabiting and he argued it was non-matrimonial irrespective of the tax planning transfer into Mrs S’s name.  Mrs Standish sought to argue that the transfer and confirmation to HMRC that this was a gift evidenced matrimonialisation (meaning the alchemy of an asset generated by one party pre-marriage, becoming a family asset, ripe for division on divorce).  

However the Supreme Court has unanimously disagreed and dismissed Mrs Standish’s appeal for a share of the £80m. This judgment has reaffirmed the importance of defining matrimonial and non-matrimonial property on divorce and has made clear that the legal owner of property is not a definitive way to determine this.

The Supreme Court emphasised the need to look at the source of the asset and consider how they were generated i.e. was it through endeavours of a party during the marriage. The general rule remains that non-matrimonial assets would only be subject to division in cases of need e.g. in matters where if these funds were left ring-fenced for one party, the other party would struggle to meet their housing/financial needs.

Some have queried if the case could mean pre-nuptial agreements are less important i.e. if non-matrimonial assets should be excluded from division anyway – do you need an agreement to reaffirm this is the parties wish and understanding? In short, yes! This long and very expensive case has reaffirmed the need for a pre-nuptial agreements, and the benefits of having a document which confirm on marriage (or later, for a post-nuptial agreement) how/when the assets were generated and accordingly which property the parties agree are non-matrimonial from the off. If tax planning is already being contemplated – this could also be reflected in the document or added on a review. Parties should not rely on a source of asset tracing exercise instead of a nuptial agreement as things can get messy, as this case demonstrates.

If Mrs Standish had used the gift for family expenses during marriage and/or without the proviso from Mr Standish that paperwork was for ‘tax purposes only’ then the argument for matrimonialisation, could have been stronger. If it had been generated by Mr Standish during the marriage and then gifted to Mrs Standish – again, a different story. But for the cases where finances have been structured for tax purposes and the assets generated before/after the marriage – owning the legal title to the asset does not automatically make it matrimonial.

The tax man may be as unimpressed as Mrs Standish by the result – but the case brings greater clarity, non-matrimonial property should not be shared on divorce (except in cases of need). It remains best practice to get a pre or post nup to record the parties understanding of what assets would be divided or divorce and how.

Ella Welsby is a partner at DMH Stallard