Since the Supreme Court judgment in Standish, there has been much legal comment around its implications for financial professionals.
The case concerned a couple divorcing after 15 years of marriage. Whilst they were happily married, the husband in the case had been advised to transfer assets totalling £77.8 million from his sole name into his wife’s name to benefit from her non-dom tax status.
Somewhat unwittingly, by making that transfer he exposed what was otherwise a non-matrimonial asset, owned by him prior to the marriage and potentially protected on divorce, to an argument that it could be considered matrimonial property. That change of character from non-matrimonial to matrimonial is a process colloquially termed mingling or more legalistically referred to as matrimonialisation.
Relying on this matrimonialisation concept, the wife argued that she should at the very least be entitled to a 50% share of these assets on divorce.
The Supreme Court in its 18 page judgment, went through the history of the matrimonialisation concept and gave a verdict on the wife’s argument.
It rejected the notion that matrimonialisation should be determined based just on legal title. In other words, it is not just the legal ownership that would have a bearing on the court’s decision as to whether matrimonialisation has occurred and as a consequence any non-matrimonial property should be shared. The asset has to be treated as joint.
It was dealt with in the judgment at paragraph 56 as follows:
‘In relation to a scheme designed to save tax, under which one spouse transfers an asset to the other spouse, the parties’ dealings with the asset, irrespective of the time period involved, do not normally show that the asset is being treated as shared between them. Rather the intention is simply to save tax. Tax planning schemes to save income tax, involving transfers of assets from one spouse to another, are commonplace given that there is no capital transfer tax on transfers between spouses. However, transfers of capital assets with the intention of saving tax, do not, without some further compelling evidence, establish that the parties are treating the capital asset as shared between them.’
Some commentators have suggested that this determination gives financial professionals a greenlight to advise their clients to transfer non-matrimonial assets into the sole names of their spouses, without there being a risk of some form of comeback on divorce. Were it not for divorce, this transfer might well be a sensible piece of advice solely for tax planning purposes. I would suggest however that this is not the complete picture.
Does transfer not provoke sharing?
The Supreme Court observed that the test as to whether matrimonialisation has occurred is a more qualitative one – based not just on the legal ownership but also on how the asset has been treated by the parties. It will turn on what evidence there is to suggest that the assets in question were being shared between the spouses.
It is quite possible that the transfer of a non-matrimonial asset to a receiving spouse will not lead to a greater sharing of it in reality. I would suggest however that there is at least a reasonable chance in many cases that the transfer of title will make that more likely to happen. The more a spouse has an involvement in a non-matrimonial asset, the greater the likelihood it will be deemed to have been shared, and the less likely that asset is to be preserved. At best, the transfer of legal title to the receiving spouse does not make it less likely they will have that involvement. At worst, and potentially more likely, it increases the chances of their having that involvement.
Take, for example, a holiday home in the Lake District that was owned by one of the spouses at the start of the marriage. They might be advised to transfer that property into their joint names or the sole name of their spouse. That spouse’s receipt of the property might in-turn spur them on to take more of an interest in it. They might take more control of the property’s management, it’s letting and any improvements made to it. They might be more likely to invite people to stay and potentially use it for themselves.
The same principle might apply to shares in a company. The transfer of non-matrimonial shareholding might prompt the transferee to involve themselves in the company’s oversight, management and strategic decision-making. Since they are a shareholder, they might consider it only right that they should help their spouse with HR issues or management of the property from which the business operates. This might be a level of involvement they would not have been minded to have, but for the transfer of an interest in the company. Since they have been transferred that asset, they consider it only fair that they “give back” by taking on some of the burden.
These are decisions on the ground about the non-matrimonial property that might increase the likelihood of a court considering it was shared, and thus matrimonialised, on divorce. They are also decisions that might have not been made had the transfer of legal title between spouses not occurred in the first place. Those decisions, following Standish, risk enhancing future matrimonialisation arguments many years hence.
Of course, none of us can predict whether the clients we advise might in the future divorce. We can only seek to do our best based on the knowledge that we have at the time we are advising them.
It follows that I would not recommend financial professionals use Standish as a greenlight to transfer non-matrimonial property between spouses. This would in the most part cover assets held by either spouse at the outset of the marriage, but also inheritance or gifts from family members as well.
Instead, my strong advice would be that if such transfers are being considered for tax purposes, they are accompanied by a recommendation that a postnuptial agreement be looked at too.
Postnuptial agreements
Postnuptial agreements are entered into by a couple who are already married. They record how the couple agree some or all of their assets should be dealt with on divorce. They are not legally binding but carry significant persuasive weight and a strong steering influence if ever there is a divorce in the future. If they are drafted correctly, they will make clear that the intention of the divorcing couple was not that the mere transfer of the non-matrimonial property between the spouses should mean that they have an equal or any entitlement to it on divorce. The agreement will often record that the spouse receiving the asset should have no claims against the non-matrimonial property even though it is intended to be transferred for tax reasons.
Purely from the point of view of potential divorce, a strategy that avoids the transfer of non-matrimonial property into joint names is still going to be the safest course to follow. That transfer does need to be looked at for tax or other reasons, postnuptial agreements can help in protecting the assets from any future claims on divorce.
I would however, recommend that financial professionals speak to a specialist family lawyer before taking any of these steps.