If you’re considering or going through a divorce, then the financial aspects of your separation are likely to be one of your major concerns. During the divorce a spouse may suspect that their partner is spending (or moving) money before the divorce is completed in an attempt to reduce the pot of money and assets to be shared as part of the financial settlement. But is this legal? How do you spot that this is happening? And can you stop it? Here we discuss the answers to these questions and more.
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Can a spouse spend/give/invest money to reduce a financial settlement?
When solicitors negotiate a financial arrangement, or a court comes to any decision regarding a settlement on divorce, it is based on the Matrimonial Causes Act, 1973. This Act says that all the facts of the case should be considered, including:
“the conduct of each of the parties, if that conduct is such that it would in the opinion of the court be inequitable to disregard it.”
What this means is that any reckless spending can, in theory, be taken into account when arriving at a financial settlement. This is done by ‘adding back’ the money that has been spent, although historically courts have made it clear they will only undertake adding back with extreme caution.
However, if you believe that your spouse is intentionally spending money to reduce your assets (and therefore the value of any financial settlement), you have to provide clear evidence of ‘wanton dissipation’.
You will have to show that:
- Your spouse’s behaviour that led to the reduction in the value of your assets was ‘wanton’
- Their motivation was to reduce the amount of your financial claim.
What are the warning signs a spouse is spending, and what should I look out for?
Divorce is a stressful event, and sometimes the parties involved can behave vindictively, particularly where their finances are concerned.
While there can be instances where the other party is not entirely truthful about their financial situation during the divorce process, and may even hide assets, another potential area of concern is where one party starts to recklessly spend – known as the ‘dissipation of marital assets’.
This situation occurs where a spouse spends or squanders assets in an attempt to reduce the total value of marital assets, consequently reducing the value of any potential settlement.
So, what should you look out for?
- Substantial cash withdrawals from your bank or savings accounts
- Significant ‘gifts’ to friends or family
- Expensive purchases, perhaps to support a hobby
- Expensive holidays or trips
- Secretive behaviour when it comes to your finances
- Unusual transactions on your bank or credit cards that you can’t recognise
- The sale of assets.
Bear in mind that the amount of ‘dissipation’ needs to be:
- Substantial enough to make a difference to the court when dividing the marital assets
- ‘Frivolous and unusual’, meaning it has no serious purpose and it started occurring once a separation was obvious among the parties.
So, for example, an expensive hobby or poor spending habits that existed throughout the marriage would probably not meet the test for ‘wanton dissipation’, and be considered behaviour consistent within the marriage or that of a “flawed individual.”
However, the effects of uncovering dissipated assets can be significant (see the sections below). In addition, evidence of poor behaviour which reduces the credibility of your spouse could be valuable when it comes to negotiating a settlement, either in or out of court.
If you do notice your spouse is starting to spend money, or they begin to move assets around, you should contact a specialist family solicitor in order to ensure that you are protected in the event of a divorce.
How can I prevent my spouse spending money?
As we have seen, in order to litigate because you believe your spouse is recklessly reducing the value of your marital assets, you have to be able to prove that their behaviour was ‘wanton’ and that they were motivated by a desire to reduce your financial settlement.
Courts will also only agree to your claim in circumstances where assets are greater than the financial needs of the parties and it makes a substantial difference to the settlement.
A court’s powers can extend to preventing assets from being transferred elsewhere if you believe that your spouse is about to spend money to frustrate the fair sharing of assets. You will have to:
- Provide evidence that a disposal is likely to happen and that an order is necessary
- Show that the intended disposal of assets would defeat your claim for an equitable division of your marital resources
- Evidence that there is an intention to frustrate your claim.
If the court is satisfied that this is the case, it can make a ‘freezing order’ also know as ‘Mareva Injunctions’ to prevent the other party from disposing of an asset. This is a type of injunction that prevents someone selling or using assets in a way that undermines their value or otherwise disposing of them.
A freezing order could disable access to funds in bank accounts or restrict spending on an account to a fixed daily limit. It could also prevent a spouse from drawing down a pension lump sum. It can even be used against a third party – for example, another individual who is believed to be holding funds on trust for the other party where this is purely for the purposes of reducing a financial claim. It is important to bear in mind that this type of freezing order is time limited and temporary in nature.
Freezing orders can be obtained against assets such as property, bank accounts, shares or jewellery within England and Wales, or abroad, and can freeze assets overseas such as offshore bank accounts, properties and other matrimonial assets.
As this type of application ordinarily needs to be heard quickly, it can be expensive. You should always work out whether the value of assets outweigh any potential legal costs you may incur in obtaining the order. This is particularly true if the court makes no order for costs, and you end up paying your own legal fees.
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Can a spouse be forced to ‘add back’ to the pot the money or assets they’ve spent?
While there are some ways of preventing your estranged spouse from dissipating your financial assets, you may be in a situation where they have already started to spend money since you separated.
Remember that the court can consider this type of behaviour in its judgement where it would be ‘inequitable to disregard it’.
In this situation you can ask the court to ‘add back’ these funds to the combined total of matrimonial assets. While the cash may already be spent, it may result in your spouse receiving a smaller share of the remaining assets.
Note that this is where:
- Spending has happened after your separation
- Their behaviour is different to that which they showed while you were married.
The court can insist that an amount is ‘added back’ to the matrimonial pot where there has been a ‘wanton dissipation of assets’ following the case of Vaughn v Vaughn (2007).
One exception to this comes from the 2015 case of MAP v MFP which many believe has made ‘adding back’ resources more difficult. This is because the judge may recognise that the reckless financial behaviour may be due to the ‘flawed character’ of an individual.
In MAP v MVP, the husband spent several hundred thousand pounds after he separated from his wife of 40 years. This money was used to pay for drugs, escorts and treatment in rehab, amongst other things.
The key points of the case were:
- The husband had spent £230,000 on drugs rehab. The court found that this should not be added back as the husband had an addiction that he was trying to address through treatment.
- The court did not add back £260,000 spent on property improvements as they found it had not been done deliberately to reduce the wife’s claim, but because of his ‘flawed character’.
- The court did not add back the £250,000 the husband spent on drugs and escorts, as the judge held a spouse must take their partner as they find them, noting “it would be wrong to allow the wife to take advantage of the husband’s great abilities that enabled him to make such a success of the company while not taking the financial hit from his personality flaw that led to his cocaine addiction … It may have been morally culpable, overall, it was irresponsible. But I find that this was not deliberate or wanton dissipation”.
Where the court did ‘add back’ money was where the wife had been dismissed from the husband’s company following separation and, as a result, was no longer eligible for entrepreneurs’ relief on her shareholding. The judge also ordered that a dividend that the husband had unreasonably held from the wife be added back.
This case shows that a claim to ‘add back’ money is only likely to succeed in cases where there has been clear and out-of-character financial misconduct and the behaviour must be obvious.
Does it matter if assets are in my spouse’s sole name?
Many people believe that it’s possible to protect your assets by retaining them in sole ownership. Properties, shares or other assets are frequently retained in the name of one party during a marriage, while individuals often seek to transfer assets into their sole name in the expectation of a divorce.
However, it is a misconception that assets held in a person’s sole name are somehow excluded from any division of marital resources in divorce. Under the Matrimonial Causes Act 1973, courts have the power to amend the ownership of assets between parties, such as transferring properties and ordering payments of cash from one party to another to achieve an equitable outcome.
This means that transferring assets into a person’s sole name in order to keep them ‘protected’ from a settlement can be a fruitless exercise and a waste of money.
Note that the rules are different if you are unmarried. If you have lived together for decades in a home owned by the other party in their sole name, you may find you have very few rights if your relationship were to break down (unless you have children, in which cases the court does have more powers).
Are company assets treated differently to ‘private’ assets?
In the past, there have been cases where spouses had tried to hide assets from their partner in company structures with the aim of reducing the size of a divorce settlement.
However, the Supreme Court have previously made a ruling which ordered a wealthy oil tycoon to transfer the ownership of a property portfolio to his ex-wife, even though these assets were held by an offshore company.
While lawyers welcomed the decision as a “blow against cheating spouses who seek to evade their responsibilities using corporate structures” it does not mean that spouses will now be able to claim business assets.
Assets held in corporate structures can only be considered if a judge rules that there has been a deliberate attempt to hide assets in a company in order the reduce the value of a divorce settlement.
There are very good reasons to set up a company – for example to pay a lower level of tax. However, if a company has been established a couple of months before a divorce, this may raise suspicions. If a judge rules this has been done with the sole intention of moving income, property or assets into a company structure, a spouse may be ordered to hand over the shares as part of an equitable settlement.
What happens if my spouse has a secret bank account that is not declared?
When couples come to divorce, they are legally required to make a full disclosure of all their assets including income, property, capital and pensions both in the UK and overseas.
This is done on the ‘Form E’ which asks questions about all aspects of an individual’s finances. It also requires a spouse to provide documentary evidence such as tax returns or bank statements, and to sign a legally binding statement confirming that all relevant information is included.
If it later transpires that a spouse has deliberately omitted information – such as not declaring a ‘secret’ bank account – this is treated as contempt of court and they can be fined or even imprisoned.
In addition, hiding information is unlikely to help an individual’s case in front of a judge, and they may also face additional costs if the other party has to hire a forensic accountant or solicitor to search for ‘hidden’ assets.
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