Reasoned or Random? Why are divorce settlements different?
There is no calculator for determining the distribution of assets following a divorce or the dissolution of a Civil Partnership. It has – so far anyway – not been possible to create a computer algorithm capable of coping with the discretionary approach to family law which exists in the jurisdiction of England and Wales. And we doubt it ever will be possible with the law as it currently stands.
Some people have suggested this leads to uncertainty for separating spouses or civil partners in times of great emotional trauma. They may be right. But as the argument goes for democracy – It is the worst system apart from all the others! The key point here is that family law in this jurisdiction is based on fairness. Fairness trumps everything.
For the rest of this article we will use the term divorce to include the dissolution of civil partnerships.
Let us consider two scenarios in which two separating couples have the same assets but where the financial settlements are likely to be very different indeed.
Mr and Mrs Smith
Mr and Mrs Smith have been married for 10 years. They are a similar age and they have one child, Billy, who is five years old. They have a house worth £450,000 with a mortgage of £100,000 and both earn around £50,000 per year gross. They have no savings and we will ignore pensions because they each have one with a similar value.
Firstly, we need to consider the legal principles which will be applied when considering how their finances should be separated upon divorce. Enter stage left, the Matrimonial Causes Act 1973. Section 25 (1) of this states:
“It shall be the duty of the court in deciding whether to exercise its powers …. to have regard to all the circumstances of the case, first consideration being given to the welfare while a minor of any child of the family who has not attained the age of eighteen.”
This tells us that the very first thing we need to consider is Billy, the child of the family. With Billy and his welfare firmly in mind we now move on to the second phase of analysis. Enter stage right, White v White  UKHL 54 and the ‘Sharing Principle’. Essentially, the starting position with a marriage of anything other than very short length is the equal division of all matrimonial assets, however they have been acquired. The famous phrase from Lord Nichols in that case was:
“There shall be no distinction between the home maker and the bread winner.”
Although this broad principle has very recently been challenged in the Court of Appeal in Sharp v Sharp  EWCA Civ 408, the circumstances were different in that case and for our Mr and Mrs Smith it seems clear the Sharing Principle would remain good law.
We have now reached the point where we know the first consideration is the child of the family and that there is a principle which states that the matrimonial assets should be shared. What next?
Back to the Matrimonial Causes Act 1973 and the full run of factors to be taken into account at section 25. They are as follows:
- 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, including in the case of earning capacity any increase in that capacity which it would in the opinion of the court be reasonable to expect a party to the marriage to take steps to acquire;
- The financial needs, obligations and responsibilities which each of the parties to the marriage has or is likely to have in the foreseeable future;
- The standard of living enjoyed by the family before the breakdown of the marriage;
- The age of each party to the marriage and the duration of the marriage;
- Any physical or mental disability of either of the parties to the marriage;
- 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;
- 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.
It is at this point that the process suddenly seems a bit more complicated: but with good reason. These considerations give the courts the power to treat each case differently and decide what is fair and reasonable, considering all of the circumstances in each and every case. This is really important.
What is likely to happen in the case of Mr and Mrs Smith?
Let us assume that Mr and Mrs Smith live in an area where properties with at least two bedrooms can be purchased for £250,000 to £350,000 and that they both work similar hours each week and that it is agreed that Billy will be cared for largely equally by both parents. Quite a lot of assumptions. Taking a very broad brush approach, it is likely that the Sharing Principle would prevail and the asset (house) would be divided equally. This is because, in the event that the house is sold, both parties would get £175,000 (being House value £450,000 – mortgage £100,000 = £350,000 halved = £175,000). Both have an income which should provide them with a mortgage capacity of around £250,000 (this being 5 times annual gross income 5 X £50,000 = £250,000, as very broad guide). Using the deposit of £175,000 and with a mortgage of up to £250,000 each party would have a housing fund of £425,000. This would properly house each parent and Billy. Therefore, Billy’s welfare is taken care of and the needs of each parent are met (they are both housed).
The result is therefore likely to be a completely equal division of the matrimonial assets, with each party keeping their own pension and there will be a ‘clean break’” which means there will be no maintenance (financial support) paid by either party to the other.
Mr and Mrs Smithe
Consider we have exactly the same scenario, except Mr Smithe has lost his job due to a long term medical condition whereas Mrs Smithe has been promoted and now earns £100,000 per year. This means that Mr Smithe has no mortgage capacity and Mrs Smithe potentially has a mortgage capacity of £500,000.
The first consideration is Billy. He should have a proper home with both parents. This means that Mr and Mrs Smithe have equal housing needs. So far, there is no real difference from the situation facing Mr and Mrs Smith in our first example.
But what happens next for Mr and Mrs Smithe?
They both need somewhere to live and cannot remain living together. There is still £350,000 of matrimonial equity. Would it not simply be divided equally as for Mr and Mrs Smith? Almost certainly not.
If the house proceeds (equity of £350,000) were to be divided equally, the housing resource (deposit + mortgage capacity) would be radically different for each party. Mr Smithe would have £175,000 (50% f the matrimonial home) whereas Mrs Smithe would have £675,000 (50% of the matrimonial home + £500,000 mortgage capacity). Would this be fair? No it would not. Mr Smithe would not be able to rehouse in a home suitable for himself and Billy. Accordingly, Mr Smith needs more of the money from the matrimonial home. In fact, he needs a minimum of £250,000 according to our example, which leaves Mrs Smith with £100,000 from the matrimonial home. However, with her £500,000 mortgage capacity she can still not only rehouse but buy a better property than she really needs if she wishes to.
The court broadly follows a set of rules and criteria built up from previous cases and legal precedents. These help the courts to come to conclusions around who gets what and how assets are divided. We can help you understand your legal position so you can get a clear idea of where you will be after the divorce, this way you can determine how much effort, and money, you want to go through to get a settlement. Get in touch if you would like to talk more about your position and likely divorce settlement.
Get in touch today to discuss your financial issues.