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Inherited Wealth and Ancillary Relief Claims

John Wilson of Hare Court addresses the issues that arise in financial provision cases when one or other party has assets accumulated outside the marriage


picture of john wilson barister of 1 hare court

John Wilson, Barrister, 1 Hare Court

The treatment of inherited assets in the context of ancillary relief claims was thrown into sharp relief by the decision of the House of Lords in White v White [2001] 1 AC 596 and in particular the speech of Lord Nicholls. Increasingly practitioners are finding that the husband and/or the wife have something by way of inherited wealth which came to them prior to or during the marriage. In other cases there may well be the expectation of an inheritance from a relative at some time in the future. This article will look at the various scenarios where wealth is inherited or likely to be inherited and address the issues that arise.

In applications for ancillary relief inherited assets fall to be considered under Section 25(2)(a) of the Matrimonial Causes Act 1973 as one of the "other financial resources" to which one or other of the parties to the marriage has "or is likely to have in the foreseeable future.". In White v White Lord Nicholls drew a distinction between property acquired during the marriage by one spouse by gift or succession – or property acquired prior to the marriage – and, on the other hand "matrimonial property" meaning property acquired during the marriage but not through gift or succession. He said at (2000) 2 FLR 994

"Property acquired before marriage and inherited property acquired during the marriage come from a source wholly external to the marriage. In fairness, where this property still exists, the spouse to whom it was given should be allowed to keep it. Conversely the other spouse has a weaker claim to such property than he or she may have regarding matrimonial property.

Plainly, when present, this factor is one of the circumstances of the case. It represents a contribution made to the welfare of the family by one of the parties to the marriage. The Judge should take it into account. He should decide how important it is in the particular case. The nature and value of the property and the time when and circumstances in which the property was acquired, are among relevant matters to be considered. However, in the ordinary course, this factor can be expected to carry little weight, if any, in a case where the claimant's financial needs cannot be met without recourse to this property."

Thus, in a case where resources are only sufficient – or are insufficient – to meet both parties' needs, the fact that part of those resources were inherited will carry little weight. Needs must be met. A good pre-White example of this principle in action is to be found in Schuller v Schuller [1990] 2 FLR 193. In that case the wife had left the husband in the matrimonial home and worked as a housekeeper for an elderly friend. She subsequently inherited the entirety of her friend's estate. The Court of Appeal upheld an Order that gave her only 6% of the "matrimonial assets". Such an Order had the effect of allowing both parties to be housed. The word "resources" in Section 25 was entirely unqualified and there were no words of limitation upon it. The Court had to approach the matter realistically taking into account all the available resources and doing justice in the circumstances of the case between spouses in a realistic fashion dealing with real figures and not with artificially produced figures. In Schuller that meant adding up the value of all the assets and adjusting them to achieve parity between the parties.

However, where needs can be met without recourse to inherited property (in the widest sense), such assets will be put to one side. This is a simplistic analysis and there remains the difficult question as to how one applies Lord Nicholls' dicta to the many cases that fall into that grey area where needs can be said, legitimately and reasonably to expand to bridge the gap between what a spouse could claim but for the existence of inherited assets and what that same spouse could expect in the absence of such benefaction.

In Norris v Norris [2002] EWHC 2996 (Fam) (2003) 1 FLR 1142 the question of inherited wealth and the meaning of Lord Nicholls' words were considered by Mr Justice Bennett. He found that the ratio of Lord Nicholls' speech was that inherited property represented the contribution made to the welfare of the family by one of the parties in the marriage and the judge should take it into account as such. He agreed with the view expressed by the Full Family Court of Australia in Figgins v Figgins [2002] Fam CA 688 that Lord Nicholls was not saying that inherited assets should be "quarantined". There was no fixed or immutable principle that inherited wealth should be left out of account. Whether inherited wealth should be left out of account in any particular case:

"must depend upon the facts and upon the court's assessment of fairness in each case. In this case, if the inherited assets of the wife are to be taken into account as part of her contribution to the marriage and the family, which, in my judgment, they must, then there is no reason to exclude them from the wife's assets when performing the discretionary exercise. For to do so would mean the wife could have her cake and eat it. She gets credit for her contribution from the inherited assets and further credit if the value of the inherited assets are deducted from the total of her assets before division. That would be tantamount to double counting and thus unfair."

Furthermore, the mere fact that the inherited assets had not been touched or had not become part of the "matrimonial pot" was not a reason to exclude them from consideration. What comes in by statute through the front door ought not to be put out of the back door and beyond the reach of the Court's discretionary exercise.

Mr Peter Hughes QC sitting as a Deputy High Court Judge in H v H (Financial Provision: Special Contribution) [2002] 2 FLR 1021 took a different view. There both parties had inheritances but the husband successfully argued that because one of his inheritances had always been kept separate and apart it should not be taken into account even though the wife's inheritances were being taken into account. The Court left his inheritance out of account because without taking it into account a fair balance could still be struck. It is submitted that Mr Justice Bennett's approach is to be preferred. However, the case of Currey v Currey [2004] EWCA Civ 1799 (2005) 1 FLR 952 (see below) suggests the contrary.

In P v P (Inherited Property) [2004] EWHC 1364 Fam (2005) 1 FLR 576 the husband and wife had spent 19 years of their married life together working on the farm which the husband had inherited from his family. The wife played a significant part in the physical life of the farm. It was acknowledged that the farm was more than a source of income to the husband: it was his whole life. The wife's case was that she would rather avoid a sale of the farm but the financial relief she was seeking would almost certainly necessitate the sale. At the hearing she sought £930,000 representing about 40% of the assets on the basis of an equal division with a discount to take into account the fact that the bulk of the finances were inherited. In the alternative she sought £770,000 being a housing fund and a Duxbury fund. The husband offered her £340,000 which he proposed to raise against the farm.

Mr Justice Munby held firstly that inherited property was to be taken into account when considering the assets of the parties but while sometimes the fact that the property was inherited might count for little, on other occasions that fact might be of the greatest significance.

"Fairness might require quite a different approach if the inheritance was a pecuniary legacy that accrued during the marriage than if the inheritance were a landed estate that had been within one spouse's family for generations and had been brought into the marriage with an expectation that it would be retained in specie for future generations. That said, the reluctance to realise landed property had to be kept within limits."

He made an award based upon the wife's reasonable needs for accommodation and income, not because that was the principle that applied in all farming cases, but because of the circumstances of the case referred to in the citation above. Referring to Lord Nicholls speech he emphasised the importance of his observation that

"The judge should … decide how important it is in the particular case. The nature and value of the property, and the time when and circumstances in which the property was acquired, are among the relevant matters to be considered."

There is therefore inherited property and inherited property. What is fair will depend upon all the circumstances.

In Currey v Currey the parties had been married for some 16 years by the time the marriage broke down and had five daughters aged between 8 and 18. There was no residence order and the parties were to share the care of the children during school holidays. The former matrimonial home was worth £1.1 million and there was a London property worth £625,000. Both properties were in joint names although the London property was almost fully charged to the husband's creditors and the husband's interest in the marital home had been transferred on trust to the children. The wife had investments of £928,000 derived from an income received from family trusts. She also held shares worth between £2.7 million and £3.7 million under family trusts. She was a discretionary beneficiary under another settlement. All her wealth was inherited. The husband argued for a significant capital sum/housing based upon his reasonable needs which in turn were based upon his contention that he should be entitled to a comparable standard of living to that of the wife.

Mr Justice Charles gave the wife occupation of the £1.1 million family home and gave the husband, in effect, a housing fund of £680,000 and the debt burdened London property which had little equity. He ordered the wife to pay the husband £48,000 per annum out of her £200,000 per annum gross investment income. He apparently only took the investments of £928,000 into account when checking his conclusions against the yardstick of equality. Her other inheritances were put on one side. The husband appealed on the ground that fairness dictated that the parties have broadly similar housing particularly when this was affordable and, in addition, that the husband was being discriminated against. The Court of Appeal dismissed his appeal. The Judge had carried out his discretionary functions judicially when assessing housing needs.

The Court must also take into account prospective inheritances if they are resources that a party is likely to have in the foreseeable future. The interpretation of foreseeable future assets has exercised the courts on a number of occasions. These authorities were considered by Mrs Justice Bracewell in MT v MT (Financial Provision: Lump Sum) [1992] 1 FLR 366 and her judgment is commended to practitioners facing this problem. In broad terms, the Court can ignore the prospective inheritance as too remote or uncertain, increase the award to the non inheriting spouse to take into account the benefit that will accrue to the inheriting party in the future or adjourn the application for a lump sum until the inheritance vests. How the Court chooses to proceed will depend upon a variety of factors. Generally the Courts will be minded to seek finality.

In Calder v Calder (1976) Times Law Reports a husband had a vested interest in one third of a settlement if he survived his mother and a contingent interest in a larger settlement. The Court of Appeal held that it would be wrong to ignore the settlements because the husband had the prospects of becoming a wealthy man and increased the wife's lump sum to reflect the husband's prospects.

In Priest v Priest [1980] FLR 189 the Court held that the prospect of a husband receiving a gratuity/military pension in five years time was sufficiently proximate to be regarded as the foreseeable future for the purposes of a lump sum order and ordered the husband to pay a proportion of it if and when he received it. In Milne v Milne [1981] FLR 286 the Court of Appeal followed the decision in Priest and quantified by proportion the entitlement of a wife to a share in a pension which would not fall due for 10 years. It has to be acknowledged that the likelihood of receiving a pension on a particular date is in most cases more certain than is the certainty of inheriting at some date in the future: benefactors live longer than expected or obtain new dependents; assets are used up and wills are changed. It is submitted that these factors narrow the compass of "foreseeable future".

In Michael v Michael [1986] 2 FLR 389 the Court of Appeal did not accede to submissions that a lump sum application be adjourned pending receipt of an inheritance. Lord Justice Nourse expressed the opinion that circumstances justifying an adjournment would be rare:

"In the normal case uncertainties both as to the fact of the inheritance and as to the time at which it will occur will make it impossible to hold that the property is property which is likely to be had in the foreseeable future."

In MT v MT itself the husband was bound to inherit at least one eighth of his wealthy 83 year old father's estate, if not more. The parties had lived beyond their means for many years and the husband had no assets from which a lump sum could be ordered. Mrs Justice Bracewell concluded that on an application for a lump sum in circumstances where there was a real possibility of capital from a specific source becoming available in the near future and where an order for an adjournment was the only means whereby justice could be done there was a discretionary jurisdiction to order an adjournment of the application. She adjourned the application until the death of the husband's father.

Practitioners are also directed to the recent case of Re G (Financial Provision: Liberty to restore application for a lump sum) [2004] EWHC (Fam) 88 (2004) 1 FLR 997. By a consent order in November 1995 the wife's claims for a lump sum were adjourned as there was a prospect that the husband would inherit. The husband's uncle died in July 2001 and he inherited £2.1 million. The wife was awarded a lump sum of £460,000 on a needs basis notwithstanding her remarriage (she was in the process of divorcing her second husband).

In conclusion:

• Inherited wealth is in a different category to other matrimonial assets
• Where it still exists the recipient should be allowed to keep it and the other has a weaker claim to it
• It is one of the circumstances of the case and should be regarded as part of the recipient party's contribution to the marriage
• It is not something that is quarantined
• If the other party's needs cannot be met without recourse to it the fact that it is inherited will carry little weight
• How the Court takes into account an inherited asset will depend upon the nature and value of the property, how and when it was acquired (see P v P (Inherited Property))
• Whether an inherited asset that had been kept separate and apart during the marriage should be taken into account is a matter of some controversy. It is submitted that such an asset ought to be taken into account but that the Court will then be primarily concerned with ensuring that the other party's reasonable needs are met rather than in attempting overall equality of distribution of matrimonial and inherited assets
• The Court should, it is submitted, give a more generous interpretation to "reasonable needs" the larger the overall asset base (including inheritances) is.
• If the inheritance is prospective whether it can be regarded as a resource that is likely to be available in the foreseeable future will depend upon how certain it is that a party to the marriage is going to inherit and how soon that inheritance will become available.
• With prospective inheritances that fall within Section 25(2)(a) of the 1973 Act the Court can either make an adjustment by way of increased lump sum to the other party to take account of this if there are assets available or, if justice requires it, it can exercise its discretionary jurisdiction to order an adjournment.