UK: Yet Further Case-Law Illustrates The Wide Discretion That Is Applied Richard Handel By The English Family Courts To The Treatment Of Inherited Wealth

Last Updated: 11 March 2013
Article by Richard Handel

The two recent decisions of Y v Y [2012] EWHC 2063 (Fam) and Davies v Davies [2012] EWCA Civ 1641 consider the treatment of inherited assets upon divorce. Whilst these cases create no new law, they illustrate yet again that each case will turn on its own facts and sound a cautionary tale to those who intend to marry without a pre-nuptial agreement having received or who anticipate receiving a significant inheritance.

In Y v Y, the parties were married for 26 years. The husband’s family had accumulated great wealth founding a large Estate in Oxfordshire worth just short of £27million to which the husband became beneficially entitled one year before marriage and four years later it was passed to him absolutely.

The Judge concluded that the wealth was non-matrimonial (i.e. it had not been acquired during the marriage but derived from the husband’s inheritance), and therefore the Court should be slow invade it without good reason. However, the wife’s capital and income needs had to be met and to satisfy those there would have to be some sharing of the inherited assets.

The wife was awarded a total of £8.7million (32.5%) which left the husband with £18million (67.5%). The Judge said the award would meet the wife’s needs but that her entitlement to share in the inherited wealth should be limited to her needs.

This approach is to be compared with that in the case of Davies v Davies which primarily concerned the treatment of a hotel that had been inherited by the husband prior to marriage. The husband appealed against a decision to award the wife £2.2m and the matrimonial home arguing that the wife’s entitlement was modest as it was a short marriage and the award should not invade the hotel as it was not the product of a shared endeavor because it had been passed down to him from earlier generations and the wife had made only limited contributions to it. The wife’s case was that the status of the hotel had risen dramatically as a result of her enterprise although she accepted that one-third of the value should be ring-fenced and excluded from the sharing principle but the rest should be divided.

The Judge at first instance found that at the beginning of the parties’ relationship, the net value of assets in the business, apart from the hotel properties, was effectively nil. He concluded that the wife had made a high contribution to the hotel’s success and that it would be impossible to identify the parties’ differing contributions. Without attributing a value to the hotel as at the start of the relationship he accepted the wife’s argument that one-third of the available assets should be attributed to the husband and excluded from the sharing principle with the remaining two-thirds being divided between the parties.

The Court of Appeal held that although the Judge erred in accepting that the business itself had effectively no value at the date the husband acquired it, the result he ultimately ordered was not infected by that error as it was unlikely that the value of the business was as significant as the husband had suggested, and in any event the wife’s commitment had played an important role in maintaining such value as it had. The effect of the order was to give the wife approximately one-third and the husband two-thirds of the total available assets, and that reflected the derivation of the hotel and its trade. Accordingly, it was inappropriate to interfere with the Judge’s assessment of the appropriate split of assets.

As these reported cases illustrate the outcome of each case dealing with inherited assets will depend entirely on its own facts. Given the current uncertainty of the law in this area, any individual who may find themselves in a similar situation to the husbands in these cases should consider how such wealth may be protected.

The Law Commission is due to report later this year on the approach of the English Court to division of non-matrimonial assets but whether that will herald a change in the law for the treatment of inherited wealth remains to be seen. At present, it is advisable for an individual to seek to protect their inherited wealth by entering into a pre-nuptial or post-nuptial agreement. Although not legally binding on the Court, since the Supreme Court decision in Radmacher v Granatino [2010] UKSC 42 they can be upheld provided the outcome and the procedure adopted in negotiating the agreement are fair.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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