In the recent case of Wallace v Wallace the court was asked to consider the defender’s latent tax liability when deciding how the parties’ matrimonial property should be divided upon divorce. The husband in this case would incur a significant tax liability in extracting money from his company to make payment to his wife. Accordingly, he argued that his latent tax liability was a “special circumstance” which the court should take into account when deciding how much money he should be ordered to pay to his wife.
What is a special circumstance?
Following a separation the starting position in Scotland is that the net value of matrimonial property should be divided fairly. Fairly usually means equally, but various factors can justify a departure from equal sharing. These factors are called “special circumstances” and may result in one spouse retaining more than 50% of the net value of the parties’ matrimonial property.
Examples of special circumstances which have previously been used to justify a departure from equal sharing are:
- The existence of an agreement where spouses have determined how some or all of their matrimonial property should be divided. An example of this would be prenuptial agreements.
- Where one person invests non-matrimonial property such as a gift from family or inheritance into matrimonial property. Examples of this are when gifts from family members are used to buy a family home; or if a property owned before marriage is sold and the sale proceeds are reinvested into an asset which becomes matrimonial property.
- The actions of one party are found to have reduced the net value of matrimonial property. For example, if one party gambles excessively or deliberately places themselves in debt this may justify that person retaining less than 50% of the net value of matrimonial property. It can also include a situation whereby one person transfers assets to someone else’s name prior to separation or destroys valuable assets (so think twice before taking your keys to your former partner’s new car).
However, the courts have been clear that special circumstances can be wide ranging and varied and the court will consider new “special circumstances” if one party seeks to argue that something about their lives justifies a departure from equal sharing.
How could tax be a special circumstance?
In Wallace v Wallace the largest asset was the business the husband had started during the parties’ marriage. It was accepted that he would retain this business after the parties divorced. Therefore, to achieve a fair division of the net value of the parties’ matrimonial property, both parties accepted that the husband would need to make a large payment of capital to his wife.
The question for the court was how large this payment should be to achieve a fair division. The husband argued that to pay his wife he would need to extract money from his company. This would incur significant tax consequences. The husband asked the court to take into account his tax liability when considering the level of payment he should make to his wife. Effectively, he asked that the tax he would have to pay be deducted from the money being paid to his wife.
Tax can be a special circumstance
In this case the court decided that the husband’s latent tax liability should be taken into account when determining how much money he had to pay to his wife. The court decided that both parties should share in the burden of tax.
Key takeaways
It is important to understand what the tax consequences are of any proposed division of matrimonial property before proceeding to court or reaching a final agreement regarding the division of matrimonial property. You should take advice from financial advisors, accountants and solicitors at an early stage to determine the legal and tax consequences of dividing your matrimonial property.
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