The law on 'non-matrimonial' property remains ambiguous, write Jo Edwards and Jamie Gaw.
With UK house prices continuing to rise at a rate that outstrips wage increases, many young people look to family to enable them to realise their dream of being a homeowner. Research conducted earlier this year estimated that the combined value of funds contributed by parents towards children's property purchases will amount to £5 billion in 2016, making the 'Bank of Mum and Dad' a top ten mortgage lender.
Most HNWs are happy to help their offspring on to the property ladder; indeed, doing so can have the additional benefit of reducing inheritance tax. However, with 250,000 divorces in this country every year, many wonder what happens if their child marries after they have purchased their first home or, more to the point, if they get divorced?
In the absence of a pre-nuptial agreement, the English court's usual starting point on divorce is to divide all capital 50/50. That said, the family court has wide discretion, and in certain circumstances there can be departure from equality, e.g. for reasons of need or contributions. Frequently there are arguments about whether property acquired prior to the marriage or by inheritance should be ring-fenced. However the law relating to 'non-matrimonial' property remains ambiguous, despite the Law Commission's 2014 report on the need for reform.
Typically the family home is regarded as matrimonial property due to its central role in the marriage. More often than not (especially if there has been a long marriage), providing that parties' needs are thereby met, the equity in the family home will be divided equally, notwithstanding that one party may have made a greater financial contribution than the other.
Even if one spouse contends that their parents loaned them the funds, the court may regard the loan as 'soft' and unlikely to be enforced, unless there is evidence to the contrary, e.g. a contemporaneous loan agreement and a track-record of repayments. However loaning money (rather than gifting it) risks bringing those funds back into the donor's estate for IHT purposes. Moreover it is often unaffordable for children to make repayments.
Understandably many parents want to ensure that their contributions are protected in the event of divorce. To this end, increasingly parents are encouraging children to enter into pre-nuptial agreements in order to protect family wealth.
So how effective are pre-nuptial agreements in ring-fencing parental contributions to a child's property purchase? The answer depends on the substance of the agreement and the circumstances in which it was entered into. While nuptial agreements are not automatically binding under English law, since the 2010 case of Radmacher v Granatino, the starting point is that a nuptial agreement will be upheld, unless there are cogent reasons why it should not.
The court's guidance is that a pre-nup should be upheld providing the following conditions are met:
- It must be freely entered into by each party (and signed at least 28 days before the wedding)
- Each party must have full appreciation of its implications (normally this means that both parties should have taken independent legal advice)
- There must have been full financial disclosure by each party
- It must be fair
- It cannot completely dismiss any power of the court and it cannot prevent either party from making an application for financial provision for any children of the marriage
It is often the fourth requirement, that the agreement is fair, which creates the biggest difficulty. The question of fairness is a subjective concept and depends on the particular circumstances. However broadly the concept of what is fair is linked to the question of needs. The agreement has to meet both parties' needs, including their income needs and, most pertinently in the context of parental contributions to the family home, their housing needs.
Say that prior to a marriage the wife-to-be was gifted £1 million by her parents towards a property purchase, and she had inheritance prospects of a further £5 million. In contrast, her intended husband had no assets to speak of. In this situation the court would be unlikely to uphold a pre-nuptial agreement that left nothing to the husband on divorce. Rather the wife would be better advised to deal with the husband's housing needs in the pre-nup. The advantage of this is that while the husband may need to be provided with some capital to meet his housing needs, his award can be significantly limited compared to his likely entitlement without a pre-nup. Moreover any uplift in housing needs as a result of having children could be provided for on a 'Schedule 1' basis, i.e. on trust and to revert to the wife once the children grow up.
In short, while pre-nuptial agreements may not always be able to ring-fence family wealth entirely, they are an effective method of protecting pre-acquired assets and family gifts/inheritance, as far as is permitted under English law.