In divorce proceedings, a husband transferred £80 million to his wife for inheritance tax planning purposes, intending she would place assets in trusts for their children. The Supreme Court held this transfer did not ‘matrimonialise’ the husband’s pre-marital assets, clarifying that the sharing principle applies only to matrimonial property.
Background
The appellant wife and respondent husband married in December 2005. The husband, a highly successful financial services executive who had risen to the top of UBS, had accumulated very significant pre-marital wealth. By 2017, the overwhelming preponderance of the couple’s wealth remained in the husband’s sole name. In 2016/2017, the husband took tax planning advice in anticipation of becoming deemed domiciled in the United Kingdom. To negate a potential inheritance tax liability of approximately £32 million, he transferred investment funds worth approximately £77.8 million (the ‘2017 Assets’) into the wife’s sole name. The intention was that the wife would subsequently establish discretionary trusts in Jersey for the benefit of their two children. The wife never established those trusts. The marriage broke down in 2020 and decree nisi was granted on 30 September 2020. At the time of the hearing before Moor J in May 2022, the 2017 Assets were worth approximately £80 million and total assets amounted to £132.6 million, of which £95.7 million was in the wife’s name and £36.9 million in the husband’s.
The first instance decision
Moor J held that the transfer of the 2017 Assets had matrimonialised the non-matrimonial portion of those assets, rendering the entire £80 million subject to the sharing principle. He determined total matrimonial property at £112,631,062 and, departing from equal sharing because of the source of the funds, awarded the wife 40% and the husband 60%, rounding the wife’s share down to £45 million (approximately 34% of total assets).
The Court of Appeal decision
Both parties appealed. The Court of Appeal (Moylan LJ giving the leading judgment) held that Moor J had incorrectly made the transfer of title the determinative factor. Instead, the source of the assets was determinative. The Court of Appeal concluded that 75% of the 2017 Assets remained non-matrimonial property, that there had been no matrimonialisation of those assets, and that the correct figure for matrimonial property subject to the sharing principle was approximately £50.48 million. This yielded a sharing award of approximately £25 million for the wife, but the matter was remitted for a needs assessment as the Court of Appeal could not determine whether that sum met the wife’s needs.
The Issue(s)
The central question before the Supreme Court was whether the transfer of the 2017 Assets from the husband to the wife — effected for inheritance tax planning purposes — resulted in the matrimonialisation of the husband’s pre-marital assets contained within those funds, thereby rendering them subject to the sharing principle under section 25 of the Matrimonial Causes Act 1973.
Two subsidiary but significant legal issues were also addressed: (1) whether the sharing principle applies to non-matrimonial property at all; and (2) what underpins the concept of matrimonialisation and how it should be applied.
The Court’s Reasoning
The sharing principle and non-matrimonial property
Lord Burrows and Lord Stephens (with whom Lord Reed, Lord Lloyd-Jones, and Lady Simler agreed) delivered a unanimous judgment. The Court took the opportunity to clarify the law in a significant respect. Whilst previous authority, notably Charman v Charman (No 4), had held that the sharing principle applied to all property (with better reason for departure from equality for non-matrimonial property), the Supreme Court firmly rejected that approach:
Although courts have a broad discretion in this area and despite the temptation to ‘never say never’, it is our view that the distinction between matrimonial and non-matrimonial property becomes largely meaningless if the sharing principle applies to the latter as well as the former. The law is also rendered clearer and more certain if one rejects the proposition that there can be sharing of non-matrimonial property.
The Court thus established definitively that the sharing principle applies only to matrimonial property, while non-matrimonial property may still be accessed under the needs and compensation principles.
Matrimonialisation: the governing principle
On the concept of matrimonialisation — the process by which non-matrimonial property becomes matrimonial property — the Court approved Wilson LJ’s three illustrative situations from K v L [2011] EWCA Civ 550, but emphasised that these were not exhaustive categories. The Court rejected Moylan LJ’s view that matrimonialisation should be applied narrowly:
There is no good reason to treat matrimonialisation as a narrow concept. It is neither narrow nor wide. Although this has not previously been clearly spelt out, what is important (leaving aside matrimonial property resting on contributions from each party) is to consider how the parties have been dealing with the asset and whether this shows that, over time, they have been treating the asset as shared between them. That is, matrimonialisation rests on the parties, over time, treating the asset as shared.
The phrase ‘over time’ was emphasised as meaning that the period must be sufficiently long for the parties’ treatment of the asset as shared to be regarded as settled.
Tax planning transfers
The Court articulated a fifth principle of direct relevance to the facts:
In relation to a scheme designed to save tax, under which one spouse transfers an asset to the other spouse, the parties’ dealings with the asset, irrespective of the time period involved, do not normally show that the asset is being treated as shared between them. Rather the intention is simply to save tax.
Application to the facts
Applying these principles, the Court held that the transfer of the 2017 Assets did not effect any matrimonialisation of the husband’s pre-marital wealth. The transfer was made in pursuance of a tax-mitigation scheme for the exclusive benefit of the children. The wife’s argument that the transfer was for the benefit of the family was rejected. The Court noted that inheritance tax does not apply as between spouses; accordingly, the intended beneficiaries of the scheme were clearly the children.
The parties’ intention was that the £80 million should not be retained by the wife but should be used by her to set up trusts for the children, thereby negating inheritance tax. In short, there was no matrimonialisation of the 2017 Assets because, first, the transfer was to save tax and, secondly, it was for the benefit of the children not the wife. The 2017 Assets were not, therefore, being treated by the husband and wife for any period of time as an asset that was shared between them.
The Court further observed that, had the husband simply declared himself trustee of those assets for the children, there would have been no question of matrimonialisation. The substance of his intention was essentially the same.
Practical Significance
This judgment is of considerable importance in several respects. First, it definitively resolves that the sharing principle does not extend to non-matrimonial property, overruling the approach in Charman v Charman (No 4) and bringing greater certainty to ‘big money’ divorce cases. Secondly, it provides authoritative guidance on matrimonialisation, confirming that it is not a narrow concept but rests on a principled assessment of whether the parties have, over time, treated an asset as shared between them. Thirdly, it establishes that transfers of assets between spouses for tax planning purposes will not, without further compelling evidence, constitute matrimonialisation. The case was remitted for a needs assessment to determine whether the sharing award of approximately £25 million meets the wife’s needs, preserving the primacy of the needs principle in appropriate cases.
Verdict: The appeal was dismissed. The Supreme Court upheld the decision and orders of the Court of Appeal, confirming that 75% of the 2017 Assets (the husband’s pre-marital wealth) remained non-matrimonial property, were not matrimonialised by the tax-driven transfer to the wife, and were therefore not subject to the sharing principle. The wife’s sharing award was approximately £25 million (rather than the £45 million awarded at first instance), with the matter remaining remitted for a needs assessment.
