Sue Ellingham
Posted on 1 Aug 2018

The Bank of Mum and Dad

When a marriage breaks down, decisions have to be made about how finances are to be sorted out. We have often mentioned that in order to achieve this, there are many factors that have to be taken into account.

One of these factors is set out in the Matrimonial Causes Act which says that the court shall have “particular regard to”

            “…...the income, earning capacity, property and other financial resources

            which each of the parties has or is likely to have in the foreseeable future”.

Put another way, that phrase means that, before arriving at a final decision, everything owned and earned by the parties, both at the time and in the foreseeable future (e.g. pensions) must be considered.

How the assets and income are calculated

In some cases this can be a very complex task. Here are two examples:

(i) Husband John is one of several beneficiaries under a discretionary trust. None of the beneficiaries has an absolute right to receive money from the trust and do so only if the trustees wish to pay money to one or more of them. Between 2000 and 2009 John received nothing from the trust but he has had money from it for the last 8 years.

In this case, consideration would have to be given to whether it is more likely than not that John will receive funds from the trust, with sufficient regularity in the future, for them to be treated as part of his financial resources.

The second example is this:

(ii) Wife Mary is the director and shareholder of a property investment company. During the same period of 2000 and 2009, the company performed poorly, mainly due to the effects of the recession. However, since then, it has recovered and each year she has received annual dividends of more than £30,000.

As before, the issue will be the reliability of that income for the future and whether it should be taken into account as part of her financial position.

What about liabilities?

The general rule is that the value of assets are taken to be the figure that they are worth after deducting the amount owed in liabilities.

In the case of Mary, from above, if she owes the bank £50,000, then that sum, which she will at some stage have to pay back, will be deducted before arriving at the net value of her assets. Of course, if she personally guaranteed a loan by the bank to the property company and it is more likely than not that the company will repay the the bank, then there will be no liability on Mary and that figure will be ignored. Everything depends on the particular circumstances in each case.

The bank of Mum and Dad

It has been very common over the last 10 years or so, when young, prospective house buyers have found it difficult to assemble a deposit for a house or flat, for parents to provide money to enable the couple to get a foot on the housing ladder.

If the relationship between the couple breaks down, the question may have to be asked whether the advance from the parents was a gift or a loan.

Gift

If the money paid by the parents was a gift, then there is no requirement for repayment and the source of the funds will be ignored.

Loan

If however, the payment was clearly a loan and therefore will be repaid, that liability will be taken into account, reducing the value of the assets attributed to the party who will be responsible for making the repayment.

This issue sometimes leads to one of the most fiercely contested matters to be decided when resolving finances. Most of these disagreements would be avoided if there was a clear written and signed, contemporaneous record between the paying party (usually a parent) and the couple. This would make the position entirely clear.

Conclusion

In resolving financial matters after a divorce, the aim is to achieve a fair result. Fairness demands that the correct facts are taken into account. These conclusions can be of great importance to the parties and particularly so when a large sum of money is at stake.

If you or anyone you know, are affected by the issues raised above and would like more information or some preliminary, confidential advice, please contact Sue Ellingham, Associate in our Family team, based in our Sidmouth office on Sue.Ellingham@michelmores.com or +44 (0)1395 512515