Simon Thomas
Posted on 5 May 2016

The treatment of investments in trusts in divorce proceedings

There has been much publicity in recent times about the legality of investments in assets, particularly in trusts, which are based outside the United Kingdom. This article gives a brief overview of how any such investments are treated when couples separate and have to rearrange their finances.

Background

When couples separate, everything that is owned by each party is taken into account in deciding how their resources are to be divided. We have often spoken about the fact that the basic “starting point” is that there will be an equal division of the assets unless there are sound reasons in a particular case why the resources should be divided in some other proportions. It is not the intention here to discuss the situations which might lead to an unequal division and, in any event, the principles remain the same whatever division is regarded as fair.

What are the resources?

(i) Each party has a legal obligation to make full disclosure of what they own, even if they think that the other party already has these details. This obligation for openness is taken very seriously by the courts. Indeed, if a case has to go to court and a judge finds that one party has attempted to hide the existence of assets, the judge might well take that lack of disclosure into account in arriving at the decision and penalise the party concerned by adjusting the disclosed assets in favour of the other party.

(ii) In other words, in arriving at a decision as to the fair way in which the total resources of the parties are to be divided, the courts expect and require each party to be honest and frank. That honesty extends to disclosing the existence of all assets owned by each party, either directly or indirectly.

(iii) That disclosure must include all assets, wherever they are located, and not merely those in the United Kingdom. Foreign assets might include, for example, a holiday home, a business in a foreign country or investments based abroad. It is foreign investments which have been the subject of so much comment recently.

Foreign investments

(i) For a variety of reasons, investments can be held abroad. There is nothing illegal in doing so, either from the point of view of the tax treatment of the income arising from such investments or any other reason (except that in very rare (and usually temporary) cases, it might be illegal to invest in assets in certain countries without permission if, for example, trade sanctions are in place with such a country).

(ii)  Investments abroad are usually held in the name of the investor and are managed abroad because the investment company is based in another country. For example, subject to local laws which apply in some countries, a British investor is entitled to invest in an American, French, South African or Hong Kong company whose shares are quoted on the stock exchanges in those countries. Similarly, an investor is legally permitted to invest in investment or unit trusts or bonds in such a country.

(iii) The income or capital gain arising from such investments will usually be repatriated here and the investor will pay tax (income or capital gains) on such income in the UK if the investor is resident here for tax purposes.

(iv) Some investors are, perfectly legally, not resident in the UK. In those cases, the investor will be subject to the rules as to the maximum length of time it is possible to be in the UK in any one tax year. As long as there is compliance with that requirement, there is nothing illegal about such an investment and for the income to be paid to the investor in the non UK country in which he/she is resident for tax purposes.

Foreign investments (sometimes called “trusts”)

It is this area which gives rise to the most difficulty and suspicion in divorce proceedings and, sometimes, in tax investigations. It should be said, however, that such suspicion is often misplaced, particularly if the benefits arising for the beneficiary(ies) of the trust are declared in whichever country they are resident for tax purposes.

The two types of trust most frequently used are:-

(a) An investment trust

This is a method by which an investment can be made in a fund (sometimes, perhaps misleadingly, called a “trust”) located abroad which is created specifically for the purpose of managing investments. Often, the name of each individual investor in such a fund is not immediately available or even obvious, just as would be the case if the fund managers were located in the UK.

There is nothing intrinsically illegal about such an investment and the investor is still required to declare the income (and any capital gains) arising from it to the tax authorities of the country where the investor is resident for tax purposes. It is only if the investor fails to make such a declaration that the investor is breaking tax laws.

(b) A private or family trust

Under such an arrangement, the investor (whose identity may not be disclosed) invests in a private trust administered by trustees (usually excluding the investor). The trust deed may name a specific beneficiary(ies) (which might or might not include the investor) to whom the income must be paid.

Alternatively, the trust may be written in such a way that the trustees, ostensibly, have complete discretion as to which of several named beneficiaries the income may (or may not) be paid. The beneficiaries eligible to receive such income from the trust may or may not include the investor. A beneficiary receiving such income is obliged to disclose it to the tax authorities in the country in which he/she is resident for tax purposes.

(c) In divorce proceedings, the real difficulties arise if the investor creates such a trust during (or even before) the marriage without the knowledge of the other party and then fails to disclose the existence of the trust during the divorce proceedings with the intention of attempting to prevent the trust becoming known and being taken into account.

Duty of lawyers to comply with the law

Just like everyone else, lawyers have a legal obligation to comply with the law of the country in which they practise. In the UK, lawyers are not permitted to be complicit in helping a client create an arrangement which is illegal under English law. A solicitor is, of course, entitled, and in fact obliged, to advise a client that a particular course of conduct is or may be illegal.

If a client, having told his/her solicitor about their existence, were to ask a lawyer deliberately and knowingly to omit reference to investments (whether abroad or at home) in the papers being prepared for divorce proceedings, that client would be inviting the solicitor to pervert the course of justice. No respectable solicitor would act on such instructions.

Conclusion

When parties are divorcing in the United Kingdom, assets which are located abroad are taken into account just as are assets at home. There is a legal obligation to make full disclosure of their existence.

This is clearly an area which can be complicated, and which can lead to suspicion and much time and expenses in the divorce process. Early, competent legal advice is essential.

For more information or some preliminary, confidential advice, please contact Simon Thomas, Head of the Family Team by telephone +44 (0)1392 687630 (direct line) or by email simon.thomas@michelmores.com.