A Comprehensive Guide to Financial Settlements in UK Divorces

Understanding financial settlements in divorce

The starting point for any financial settlement is what we call full disclosure which means that each of you must produce valuations and details about your assets together with documents in support. Once those details are available, you can look at how everything can be shared in the settlement.

Factors affecting divorce financial settlements in the UK Legal framework and guidelines considerations for fair and equitable settlements

The starting point for sharing capital is an equal division but the final outcome may provide one of you with more than the other. In most cases, this is because one of you has a greater financial need than the other. Section 25 of the Matrimonial Causes Act 1973 sets out the criteria that must be considered:

1. the income, earning capacity, property and other financial resources which each of the parties to the marriage has or is likely to have in the foreseeable future
2. the financial needs, obligations and responsibilities which each of the parties to the marriage has or is likely to have in the foreseeable future;
3. the standard of living enjoyed by the family before the breakdown of the marriage;
4. the age of each party to the marriage and the duration of the marriage;
5. any physical or mental disability of either of the parties to the marriage;
6. the contributions which each of the parties has made or is likely in the foreseeable future to make to the welfare of the family, including any contribution by looking after the home or caring for the family;
7. the conduct of each of the parties, if that conduct is such that it would in the opinion of the court be inequitable to disregard it;
8. the value of any pension benefits that may be lost by one party as a result of the divorce.

The main breadwinner may have a larger mortgage capacity and need a smaller deposit from the family home. The children are the first consideration whilst under 18, and the main child carer may need to keep the family home for the children.

There is no starting point for sharing income equally. It is a question of looking at each of your reasonable outgoings, whether you can meet them from your own income and, if not, whether your ex has enough surplus after paying their outgoings to pay maintenance.

Child maintenance is dealt with separately, and either dealt with by agreement between you or by making an application to the Child Maintenance Service.

Impact of prenuptial agreements

A pre-nuptial  agreement is a contract between the parties to an intended marriage or civil partnership that seeks to regulate their affairs if their relationship ends. Financial arrangements will be the main focus of such agreements, but you can also agree in what jurisdiction their divorce or dissolution will proceed.

Pre-nuptial agreements are not formally binding in England and Wales, (although they may be in some other jurisdictions which is why some couples  may need to consider jurisdiction in the agreement itself) but they are not ignored and have influenced or even decided the outcome of an application for a financial remedy, as “conduct it would be inequitable to disregard”.

Prenuptial agreements need to be carefully drafted and negotiated, after financial disclosure has taken place, well in advance of the forthcoming marriage or civil partnership, and signed at least 21 days before the wedding/ceremony date, so it is essential to get legal advice from an experienced lawyer at an early stage.

The Role of Courts and Mediation in Financial Settlements

You don’t have to go to court to get a financial settlement. Most couples prefer to reach a settlement out of court. Solicitors can help you negotiate a settlement but there are other options.

Mediation

You and your ex will meet with a trained mediator to help with your discussions and guide you towards reaching an agreement. You and your ex do not have your lawyers with you, and the mediator cannot give legal advice as they have to remain impartial, but as all the discussions in mediation are without prejudice, you can go to your lawyer for advice in between mediation meetings. The agreement reached in mediation will not be final and binding until you have a court order. This can be done by consent without having to attend any court hearings.

It is now a requirement of any contested court application for a financial settlement that you at least attempt mediation before making your court application. You’ll need your mediator to sign off your court application form if mediation is unsuccessful or unsuitable.

With considerable delays and backlogs in getting a hearing date, it can take a year or more for court cases to be concluded, at considerable financial and emotional costs to the couple involved, so more and more people are looking at alternatives to court.

Using solicitors

You might be able to negotiate a settlement through your solicitors either in correspondence or round table meetings or both.

Collaborative practice

Some solicitors are trained to negotiate settlements “collaboratively” in a series of round table meetings attended by the couple and their lawyers, which means that you have your lawyers to hand in the meeting to advise on what is being discussed. These meetings are subject to a specific agreement to avoid going to court. Both of you would need to appoint a collaboratively trained lawyer.

Private FDR

Using a private judge to give an indication of the likely outcome of your case, which should help your negotiations to settle out of court. The upfront fee is more than the court fee but you are likely to have the matter dealt with more quickly. Both of you would have to agree this.

Arbitration

Using a private judge to decide the case for you. Both of you would have to agree this. Although the upfront cost is more than going to court, the arbitrator can be asked to deal with specific points of disagreement, or to make a decision on paper, so your solicitors and the overall costs of the case come to less than the usual court proceedings.

What about business assets in a divorce settlement in the UK?

Business assets must be disclosed along with all the other assets in the marriage and the starting point is that your husband or wife must give a valuation for their business interest and disclose the last two years’ accounts. Whether you actually have a claim on the business will depend on the value and the nature of the business itself. Some businesses are purely a means of generating income so you’re unlikely to get any extra capital from the settlement for your spouse’s business. An example of that is subcontractors who run their income through a limited company.

Businesses will not always be sold in the financial settlement and courts are reluctant to take away or devalue the business owner’s livelihood. Some businesses, however, do have capital assets that can potentially be used towards reaching a settlement. Again, it depends on the nature and value of the business and its assets. For example, a business might own a number of properties that can be sold or mortgaged to raise capital. In most cases where there is a business you will need an accountant’s advice on the value on how best to release capital or whether it can be released at all.

Case Studies: Fair Divorce Settlement Examples in the UK

Example: Analysing a settlement with children involved

Dependent children are the first consideration in any divorce settlement. As most cases turn on meeting each party’s reasonable needs, the parent with whom the children mainly live is going to have the greater need, at least until the children have flown the nest. Quite often, one parent is the main homemaker and childcarer whilst the other is the main breadwinner. The childcarer may have put their career on hold and be in a less secure position financially than the other. The law is concerned that the financially disadvantaged parent should not be penalised for this and gives as much recognition to their contribution to the marriage as child carer as it does to the main breadwinner.

A typical case where there are children might be: the couple met whilst they were both working in the city. A couple of years into their marriage, they have their first child and mum works part time. When they have their second child she gives up work as dad earns sufficient to comfortably support the family from his salary alone.

They have a nice home subject to a mortgage where each child has their own bedroom and there is a spare room that is used as a home office. Dad is able to invest some of his income in stocks and shares. When both children are at secondary school, mum starts a part-time job in a local school and keeps her modest income as her spending money.

They get divorced when the children are in their teens. The children choose to live with mum. She needs a home large enough for her and the children but is unable to get much of a mortgage and she cannot afford to pay the mortgage and bills on the family home without support from dad.

If there is enough equity in the family home it might have to be sold, mum and children move to a smaller more affordable home without a mortgage and dad keeps his investments/maybe receives a small amount of the sale proceeds from the family home as a deposit for a home of his own subject to a mortgage.

If dad earns more than enough to pay his own bills and child maintenance, he might have to pay spousal maintenance to mum, as well as child maintenance, and sometimes this can be enough to keep mum and children in the family home, at least for as long as the children are dependent.

Once the children have flown the nest and they are no longer a first consideration,  mum might have to pay dad a balancing payment for his interest in the family home. This deferred arrangement is known as a Mesher order.

Dad is also likely to have the larger pension. This also needs to be shared fairly between the couple so mum is likely to end up with a share of his pension as well the family home. Alternatively, she could choose to offset or forgo her pension claim and get a larger share from the family home.

Child Custody, Support, and Maintenance

Child maintenance is dealt with separately and based on the Child Maintenance Service’s (CMS) formula. You will need to know the payer’s gross income before tax and National Insurance contributions. You can get this from their P60 or tax return. The basic child maintenance service formula is for the paying parent to pay 12% of their gross income for 1 child, 16% for 2 children and 19% for 3 or more children.

There are deductions for the number of nights the children stay with the paying parent, other children in their household, pension contributions and more. It is a good idea to use the CMS calculator as a guide to child maintenance. But you do not have to apply to the CMS if both parents agree on the child maintenance

There is an upper limit to the amount of child maintenance payable through the CMS. If the paying parent earns more than the CMS upper threshold, you can agree or apply to court for top up child maintenance.

Child maintenance usually ends when each child is 16, or 20 if they are in full time school or college. You can apply for a court order for child maintenance to be paid for longer than this if your child remains dependent, for example, if they have a disability.

The CMS can only deal with child maintenance in the UK so if a parent lives abroad, the receiving parent will need to apply for a court order for child maintenance.