In the modern world, offshore wealth is not as uncommon as it was 20 or even 10 years ago. Increasingly, financial professionals are more bullish about recommending offshore mechanisms or vehicles to their clients to mitigate tax and transparency. This might seem a perfectly sensible idea at the point tax advice is given, however in the event of divorce, it can lead to complications. The treatment of offshore wealth is now very much a key theme in international family law.
What Counts as an Offshore Asset in an English Divorce?
An offshore asset is an asset located, held or managed outside of the UK, typically in a foreign jurisdiction. It can include bank accounts in foreign countries, properties located overseas, trusts and foundations in other jurisdictions and companies registered elsewhere. These types of assets are all technically “offshore”, however typically the term “offshore assets” would tend only to cover assets held overseas for reasons of tax planning, asset protection or privacy. It is that definition of offshore assets that I will continue to use for the remainder of this article. It would typically include:
- Offshore companies, through which a divorcee would own shares in a company that would itself own the assets directly. This creates a layer of separation between the individual and the asset. Whilst Companies House in the UK provides a register of UK companies and their directors, other jurisdictions attract the registration of companies for the very reason that there is no ownership register there, and it can be harder to trace the true interested parties.
- Offshore trusts, set up in offshore jurisdictions through a settlor transferring assets into trust. Professional trustees are often appointed overseas to manage the assets. Beneficiaries can include the settlor, other family members or sometimes other offshore companies, requiring further enquiry from spouses as part of the tracing exercise.
- Offshore banking and investment accounts, often held in the names of the companies or the trusts.
If secrecy and separation is the main motivation, the settlor/beneficial owner will often look to layer-up the ownership structure through a combination of trustee/company arrangements, often registered in multiple jurisdictions with nominee directors and shareholders acting on behalf of the real owner.
The nature of actions motivated by asset protection and privacy do not sit well with the expected transparency of the family courts in England and Wales. Full and frank disclosure is expected on divorce of all assets, to include those located offshore. It is not uncommon for individuals with offshore assets structured through these layering and nominee arrangements to rely heavily on these mechanisms in divorce, effectively challenging English courts to establish their beneficial ownership. The question as to what to do against this backdrop of potential concealment is now incredibly common.
How Does English Law Approach Overseas Wealth in Divorce Proceedings?
The approach of the English courts when considering financial remedies on divorce is to first assess the level of wealth held by the divorce couple through an exchange of financial disclosure. That exchange ought to enable the parties and their advisors to understand the full array of assets in which they each have an interest, or might in the future have an interest, together with any nuances or complications underpinning each of the assets disclosed. If the level of wealth is less than the parties and their children collectively require to meet their needs, the parties must agree or the courts must determine how those assets should be best utilitised to meet that needs-shortfall. After a long marriage with adult children, the court will often conclude that the couple have equivalent needs and seek an arrangement resulting in an equal asset division.
In divorces where there is a surplus of capital over needs the question of non-matrimonial property can prove relevant. Non-matrimonial wealth refers to assets that were not built up during the marriage. This might either be because they were acquired before the marriage or because they were received during the marriage by way of gift from a third party or inheritance.
Non-matrimonial property can (often inadvertently) be made matrimonial during a marriage through the actions of the couple, and therefore be subject to the sharing principle. The most common way this “matrimonialisation” occurred is through:
- Transferring the wealth or a share in the wealth into the name of the other spouse.
- Using the wealth for common purpose, such as a property as a family home, or an inheritance to pay down a mortgage.
Little regard is often had for the implications of “mingling” the non-matrimonial property in this way at the time it matrimonialised, however it can have incredibly damaging consequences for the individual or family looking to preserve their family wealth from claims on divorce.
The same approach is taken to matrimonial and non-matrimonial assets whether an asset is held onshore or offshore. That said, offshore assets often derive from outside sources and in my experience are less commonly mingled, so potentially less prone to matrimonialisation. They still have to be declared as part of the disclosure process, however.
What Disclosure Obligations Apply to Offshore Assets in English Divorce Proceedings?
Full financial disclosure has to be given of all interests in all assets, whether they are held England or elsewhere. It is only through that disclosure being given that the court is able to form a view as to the division of assets needed to satisfy both parties’ claims and deliver a fair outcome. If either divorcing party failed to properly disclose their offshore wealth then:
- Discovery proceedings can be considered.
- The involvement of overseas lawyers and other professionals can be looked at to better facilitate the full disclosure that is needed.
- The commissioning of enquiry agents can be considered to better source information that might assist the court to better understand the level of disclosure that ought have been provided.
What are the Practical Challenges in Valuing Offshore Assets?
Many of the challenges that arise when trying to understand the value of offshore assets come up from time to time when looking to value assets within the jurisdiction of England and Wales. Identifying appropriate valuers, gaining access to properties and ensuring that the valuation process is progressed in a timely way are all issues common to valuations in England and Wales, or elsewhere.
That said, there can be a few unique hurdles to overcome when looking to value assets held offshore:
- Independence – it can sometimes be hard to establish true independence from both parties or their professional advisors when identifying and instructing an overseas valuer. Whilst thankfully the vast majority of professionals take their obligations very seriously when accepting instructions, this does not prevent accusations of bias sometimes arising. This is much easier to oversee when the valuation exercise is being conducted in England and Wales. Outside of the domestic jurisdiction this can be a lot harder and, as a consequence, it is not uncommon for suspicions to sometimes arise that the expert is not truly independent. This can sometimes be covered off through the instruction of a local lawyer to oversee the exercise and ensure impartiality.
- Practicalities – it might at first seem a simple thing, however ensuring the valuations are progressed and properly undertaken can sometimes prove difficult. The best advice around this is to be rigorous in your dealings with the overseas expert and again, consider the use of overseas lawyer to better ensure the valuation is progressed in a timely way.
Very often larger professional services firms will have UK offices through which the instruction of the expert can be channelled. As well as saving time and complication, this can provide some added reassurance to the parties seeking the valuation advice.
How does Jurisdiction and Forum Disputes Affect Cases Involving Offshore Wealth?
Jurisdiction and forum need to be determined before proceeding with a financial claim. Where there is a risk of this being in dispute it is of paramount importance that advice is taken early. Failure to do so can have vast-reaching consequences to the extent of one’s financial claims and, in particular, the success or otherwise of pursuing a share of assets held offshore.
In the most part, jurisdiction is determined by domicile and habitual residence overlaid with a consideration as to the most appropriate forum. This is a highly specialist area of law and advice really does need to be sought at an early stage if it seems like likely this is going to be a factor.
How can Individuals with Offshore Wealth Achieve a Fair and Secure Settlement?
Where financial claims are being sought against backdrop of a complicated asset profile, I am a great believer in talking through strategy at an early stage. This helps us identify a pathway through to towards achieving a favourable settlement and a route that heads off potential pitfalls that might arise along the way. It is better to plan and check these off ahead of time rather than confronting them as they arise, as many family solicitors experienced in this area will tend to do.
Early advice from specialist solicitors is however key and the strongest recommendation I can give is that this is sought at the earliest opportunity to provide reassurance and direction as quickly as possible.