Divide and conquer

A second home is a fact of life for many British people these days '“ a family bolt hole or holiday getaway in France or Spain, or Croatia perhaps.

Some still prefer a second home closer to the first one; a holiday cottage, or, for those who can afford it, a castle in Scotland has long been popular. Yet, sadly, the second home can also become an asset to argue over in the event of a divorce or separation. And, more importantly, there can be some unforeseen consequences of having that second home in another jurisdiction.

People largely associate forum shopping in divorces with crossing foreign borders, rather than moving within the British Isles. The reality, however, is that the Scottish laws regulating financial provision upon divorce are very different from those in England. In many cases this difference has little impact on the eventual outcome, whether it is in England or Scotland. However, in five to ten per cent of cases the financial outcomes on divorce will be substantially different, depending on whether the divorce is under English law or under Scots law.

For example, take the fictional situation of Justin and Susan. They married at the age of 19, when Susan discovered she was pregnant with twins. At the time of their marriage Justin was working in his father's business,a small engineering company. Shortly after the marriage, Justin's father died, leaving him his shares in the business. Justin was not sure whether this was a blessing or a curse as the company's debts exceeded its assets rendering it essentially worthless. He was, however, undaunted.

He worked hard during the marriage and transformed the business into a good going concern. His shares in the business are now worth £10m; it has a healthy cash balance and gives him an income of £200,000 per annum. Other than the business, the only other substantial assets either of them own are a town house in London worth £3m, which is subject to a mortgage of £1m and a holiday house in Scotland worth £200,000.

Justin devoted so much time to his business that he and Susan have grown apart. It is a year since the twins left school and Susan has decided that it is time to tell Justin that she wants a divorce.

Justin has known that the marriage has been in trouble for a while and does not resist the notion of divorce. The real issue, however, is the level of the financial settlement that Susan would receive.

Yardstick of equality

Under English law, the court would first look at the total value of the assets at the time of the divorce hearing. There are a number of criteria used to assess the fairest way to divide the capital. The court must also be sure that it is applying a 'yardstick of equality' and that it is not discriminating against either party. In effect, this would mean that the credit for building up the value of the shares during the marriage would be shared between husband and wife, as Justin was only able to run a successful business because Susan was looking after the children.

Justin may be given some credit for the fact that the shares were owned by him before the marriage but this is likely to be only a small factor in reducing the proportion of capital gain to Susan, given the court would likely consider the marriage to be a relatively long one. She could therefore expect to receive 45-50 per cent of the assets, say £6.5m, subject to there being sufficient liquidity in the company to provide these sums without damaging it. Assuming this is sufficient to meet Susan's housing and income needs, she would receive no further sums in respect of capital.

However, the court must then check that the money Susan receives is sufficient to meet her reasonable needs. It is a long marriage and the parties have enjoyed a high standard of living. They are used to living in properties in London worth £3m. Susan will argue that she has to stay in such a property and also has income needs that must be met. If those income needs were about, for example, £120,000 per annum, she would then argue that the lump sum she receives must be sufficient to provide that level of income for the rest of her life.

In the event that Justin could not raise sufficient capital to meet Susan's needs he may well be faced with paying half of the capital to Susan and, on top of that, also paying maintenance to her to meet her income needs.

Location, location

But what about the consequences of the holiday home in Scotland? In the gradual breakdown of the marriage Susan has been spending more time in the second home in Scotland while Justin has stayed in England. Justin will join Susan at the second home in Scotland every second weekend and for most of the holidays. Susan has not abandoned her life in London and still stays there regularly. Finally, Susan took the first step to divorce. Where do they divorce? Scotland or England?

The law provides rules to regulate situations where there are competing divorce proceedings. Often the place the parties last resided together is conclusive in deciding whether the divorce is to be under English or Scots law. Did they last reside together at the summer family get together in Scotland, or the family Christmas in London? Sometimes people set it up to ensure the divorce is under the laws favourable to them, but more often than not they find themselves divorcing under either English law or Scots law by sheer chance.

Hot property

So, what would happen in the case of Justin and Susan with a Scottish divorce? Scots law places a distinct emphasis on the fair sharing of matrimonial property. Matrimonial property is essentially all property acquired as a result of the efforts of the marriage. The emphasis is on the property acquired, which is quite distinct from the wealth created during the marriage. As Justin's shares were inherited, the matrimonial property consists of only the equity in the townhouse and second home.

Fair sharing of matrimonial property is usually achieved by equal sharing. Thus, the starting point when looking at the question of financial provision upon divorce will be that Susan and Justin are both entitled to half the equity in the houses, while Justin's £10m shareholding remains untouched. This would give Susan a settlement worth £1.1m made up of the Scottish holiday home and £900,000 cash.

Both Scottish and English law apply a clean break principle to financial provision upon divorce, but it is applied much more enthusiastically in Scotlandthan it is in England. On one view Susan would be entitled to maintenance for up to three years post-divorce, to allow her to adjust to the loss of Justin's support. However, she is only 38 years old. She is still young and capable of going out to work. More to the point, she has £900,000 in the bank. Her chances of receiving ongoing maintenance in Scotland are slim.

Ordinarily an English couple living in England can only be divorced under English Law. The same goes for a Scots couple in Scotland. However, people move around the UK for all sorts of reasons. There are a significant number of husbands who reside in Scotland with their wives, but who work and live in London from Monday to Friday. If these marriages break down it is possible that divorce could be brought under either English law or Scots law.

Which side are you on?

So, when it comes to advising a client who has the potential to take their divorce under either English or Scots law, it is worth bearing in mind their jurisdictional quirks. Checking whether the client will be favoured or punished by one particular county's laws can become crucial, particularly if the case would producesignificant difference in the financial package either side of the border.

If the current jurisdiction is to their advantage, ensure you take steps topreserve this. And if it is to their disadvantage, find out if you can reasonably establish jurisdiction in the more favourable part of the UK. In Justin and Susan's case they last lived together in Scotland, so may well have assumed this was the only jurisdiction open to them. But had the solicitor taken the time to establish Susan's jurisdiction back in London, a settlement in excess of £6.5m could have been obtained, rather than the £1.1m she received under Scots law.