Scots knots

The United Kingdom is a family of nations. As such, and not unlike human families, there are both similarities and differences among its members. That is particularly acute in the context of Scots family law and the division of assets in a divorce or dissolution of civil partnership. This is important to understand, both from a family law perspective and for those advising on asset protection.

When can parties divorce in Scotland?

In order for the Scottish courts to be able to consider an action for divorce or dissolution, one or other of the parties must be able to establish jurisdiction in Scotland. That requires certain criteria to be met: one of the parties must either be (i) domiciled in Scotland on the date the action commences, or (ii) habitually resident in Scotland for one year prior to the action commencing.

How do the Scottish courts approach financial provision on divorce?

In Scotland, financial provision on divorce is governed by the Family Law (Scotland) Act 1985 (as amended) (the Act). In broad terms, the Act provides a framework for achieving fair sharing of a couple's matrimonial property (MP). Firstly, the extent and value of the MP must be identified. Then, the court must decide which, if any, orders are necessary to achieve a fair sharing of that MP between the parties.

What is MP?

The Act defines MP as:

"…all the property belonging to the parties or either of them at the relevant date which was acquired by them or him (otherwise than by way of gift or succession from a third party)—

(a) before the marriage for use by them as a family home or as furniture or plenishings for such home; or

(b) during the marriage but before the relevant date."

Under the Act, the 'relevant date' can be either the date that the parties ceased to live together or the date that a court summons or writ is issued in an action for divorce or dissolution, whichever is earlier.

The definition of MP in Scots law is relatively clear. While there will be a need to consider the facts of every couple's situation, generally speaking, any assets acquired during the marriage from the efforts of either or both of the parties will be MP.

How will the matrimonial property be divided?

Before it can make any decisions about how the net value of the MP should be shared between the parties, the court must be satisfied that granting the order(s) sought would be:

i. reasonable with regard to the parties' resources (both current and projected); and

ii. justified by the five principles enshrined in the Act.

It is not possible to give a detailed analysis of the principles here but, in broad terms, the Act provides that fair sharing will usually be achieved by equal sharing unless there are factors or special circumstances which justify a departure from equal sharing. The Act empowers the court to consider, any economic advantage and disadvantage enjoyed or suffered by the either of parties to the marriage, the financial burden of raising a child after the divorce, the need for ongoing support for a party who has been substantially financially dependent on the other during the marriage, and any financial hardship anticipated to be suffered by either party as a result of the divorce or dissolution.

Can inherited or gifted property be matrimonial property?

The Act excludes assets gifted by a third party or inherited assets from the definition of MP. However, depending on what happens with the gifted or inherited assets over the course of the marriage, they may be converted to MP. This conversion can happen when there is a fundamental change to the nature of the asset in question during the marriage. Assets acquired pre-marriage (which are not MP) can also be converted to MP in the same way. Although this makes the analysis more complex the original recipient of the gift or inheritance or the holder of the premarital assets may still rely on the original source of funds to argue for other than an equal division of the MP in which it is invested:

• A and B are married. A inherits a sum of money from his great aunt and then uses that money to buy a new car. At the point the funds where inherited by A, they would not be treated as MP. However, the car itself acquired during the marriage is MP and its value will be taken into account when considering the net value of the MP should A and B divorce
  
  
• D and E are married. E and her family have been using Financial Genius Ltd (FG) as their investment advisors for many years. E has her own account with FG, as does her father who gifts shares to E's account. At the point the shares are gifted they are not MP, but depending on what E does next they could be converted to MP. For example, if E sells the gifted shares and uses the proceeds to buy a property, the value of the property would be matrimonial. However, if the gifted shares remain within E's account with FG the value of those shares would not, generally, form part of the MP pot.

It should be noted that, in the examples above, both A and E would have a basis for arguing that since the funds used to acquire the new asset were not matrimonial (not deemed to be from the 'fruits of the marriage') the source of funds used to acquire the new asset (or a proportion of it) would justify the exclusion of the value of the new asset (or some part of it) from the MP pot available for distribution on divorce or dissolution That kind of argument can be complicated, can result in a variety of outcomes (even if successfully made) and are beyond the scope of this article, but the point to note is that it is relatively easy for assets to become MP. This is important for estate planning purposes.

Can assets be ring-fenced to prevent them from becoming matrimonial property?

It is possible for assets be shielded from becoming MP. The following options may be of use in the context of asset protection:

a. Trusts

Assets held in trust are, generally, not considered to be MP given that the assets are not owned by either of the parties to the marriage. However, much will depend on the circumstances and reasons surrounding the assets being put into trust, the exact terms of the trust deed and whether or not a trust asset has been converted into MP. For example, a distribution from a trust, to one of the parties to a divorce action, may be considered MP and could also be taken into account when considering parties' resources.

b. Pre-nuptial and post-nuptial agreements

It is open to couples to enter into an agreement setting out how assets are to be divided between them in the event that their marriage or civil partnership breaks down. Such an agreement can be entered into before or after the marriage or civil partnership takes place. The Act provides that the court should have regard to any agreement entered into between the parties. Such an agreement will be generally be upheld, other than in limited circumstances, providing it was fair and reasonable at the time it was entered into, and that the parties had the opportunity to seek independent legal advice.

c. Loans

For loans or debts to be taken into account in the context of a relationship breakdown, it will be necessary to produce a paper trail setting out their nature and extent. Debts incurred during the marriage or civil partnership are taken into account in determining the net value of the MP available for distribution on divorce or dissolution of a civil partnership. Where funds are loaned within a family, for example from parents to assist with a house purchase, it is advisable to have the terms of any loan clearly documented to avoid any arguments that funds were gifted to one party alone or both parties, and to provide clarity about repayment obligations.

The practical application of Scots law in relation to financial provision on divorce is complicated and will be highly fact specific. The key messages for advisors dealing with clients connected to Scotland who are either commencing estate planning or may find themselves involved in divorce proceedings in Scotland, are to (i) appreciate that the law is different between Scotland and the rest of the UK, and (ii) seek specialist advice from a specialist family lawyer in Scotland at the earliest opportunity.