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TAX FEATURE: Accountants in the divorce court. By Nichola Ross Martin

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24th May 2006
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The House of Lords has made a landmark ruling in two co-joined divorce cases featuring accountants, which could have major repurcussions on the treatment of high profile divorce hearings. Melissa Miller has been told that she can keep the £5 million she was awarded out of her ex-husband Alan's £17.5 million fortune. The lords have also ruled that Julia McFarlane is entitled to £250,000 a year from her ex-husband Kenneth for life - rather than the five years decided by the Court of Appeal. In light of the rulings, Nichola Ross Martin asks: "How does the treatment of marital property in the divorce courts square up with the Settlements Provisions for tax?"

The ruling by the House of Lords in the co-joined hearings of Miller v. Miller and McFarlance v. McFarlane is likely to set alarm bells ringing for other high-earning couples going through divorce proceedings.

In both cases the husbands had trained as accountants, but when their respective marriages ended in divorce, there was substantial disagreement on the split of assets and income required to make a clean break.

The Lords considered, amongst other factors, the income and assets created and shared during the period of each marriage, and the contribution of each partner. In allocating assets upon divorce, the wives' non-financial contributions were seen by the court as enabling the husbands to create working environments producing greater rewards. On divorce that means that the wife should get a fair share for her contribution and this may mean a share of future income as well as of the assets created during the period of the marriage.

It is not difficult to see that this is the polar opposite of the tax rules that we know as the Settlement Provisions (s.624 ITTOIA 2005/formerly, s.660A ICTA 1988), as a non-working spouse is not allowed to share the fruits of her husband's labour for tax purposes. Some Human Rights lawyers have argued that in this is in breach of Article 14 of the HRA 'The right to equality of treatment ' Prohibition of discrimination'. It also raises interesting questions when one considers the issue of salaries paid to working spouses. Why should a spouse be paid the same salary as an unconnected person doing the same job, when it is clear that a spouse is deemed by the divorce courts as capable of contributing a special 'extra something'?

Miller v. Miller
The childless marriage between Alan and Melissa Miller lasted less than three years. Mr Miller had trained as an accountant was a successful fund manager. During the marriage he helped set up New Star Asset Management. He was worth c.£17.5 million at the time of the couple's separation, which was caused by his infidelity. Mrs Miller worked in PR and earned £85k per year. The Lords backed her claim for a clean break divorce settlement of £5m. This reflected not only her share of the matrimonial assets which had been accumulated during the short marriage, but also compensated her for her husband's behaviour.

McFarlane v. McFarlane
Kenneth and Julia McFarlane had been married for 16 years and had three children who were all minors at the time of their divorce. He was an accountant, who during the marriage became a partner in Deloittes. She was a lawyer, who gave up her successful career to raise the children.

The case was unusual because although Mr McFarlance's share of Deloitte's partnership income was high, it rose from £455,000 in 1998-99 to £972,000 in 2000-01, the year of separation, and then to £1,286,000 in 2002-03, the couple's assets ' a flat and a house in London and a cottage in Devon, were only worth £2.2m. This meant that it was not possible to split up the assets to provide a 'clean break', and that it was necessary to allow future maintenance payments to the ex-wife.

Her contribution to "creating a working environment" which allowed her husband to pursue his own career to the top was pivotal in persuading the court that she should be paid maintenance which ensured that she was not only able to maintain her standard of living, but to also provide by way of savings and future investment of the savings, pension and insurance for herself. She was awarded maintenance of £250k p.a.for life, and her children £20k each p.a.

Comment ' husbands and wives and the Settlement rules
The ruling will be a bonus for a certain ex-Beatle, but I was drawn to the words of Baroness Hale of Richmond in the judgment, when searching for the principle, she wrote:

"English law starts from the principle of separate property during marriage. Each spouse is legally in control of his or her own property while the marriage lasts. But in real life most couples' finances become ever-more inter-linked and inter-dependent. Most couples now choose to share the ownership of much of their most significant property, in particular their matrimonial home and its contents. They also owe one another duties of support, so that what starts as individual income is used for the benefit of the whole family. There are many different ways of doing this, from pooling their whole incomes, to pooling a proportion for household purposes, to one making an allowance to the other, to one handing over the whole wage packet to the other. Some couples adopt one or other of these systems and retain it throughout their marriage. But as the gender roles also become more flexible within the marriage, with bread-winning and home-making responsibilities being shared and changing over time, so too their financial arrangements may also become more flexible and change over time. It also becomes less and less relevant to ask who technically is the owner of what."

With that in mind, perhaps it is time for Parliament to reconsider the principles behind the Settlement rules in s.624 ITTOIA 2005, they do not seem to sit well in terms of 'real life'.

Nichola Ross Martin

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Replies (8)

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By carnmores
30th May 2006 15:58

Good on you Malcolm
corporate manslaughter is an extremely difficult crime to prove and needs to be looked at continually to see if there is a way companies can properly be held to account


by contrast corporate shafting (valuing a junior at £100 ph) is almost compulsory with some firms

no names no pack drill and obviously not Deloittes

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By Malcolm Veall
30th May 2006 14:39

Deloittes
Why am I bothering to work so hard?

Is nobody else going to comment on the phenomenal Deloittes profit share amounts?

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By Taxi
30th May 2006 14:45

Nicholas - I have been following the "old HRA" angle
on Settlements for sometime, and the question is very much up for debate.
The problem that you have in terms of the settlement legislation is that h and w share their lives, this works fine in terms of the divorce problem (as this case shows), but tax does not recognise the dual contribution.
It seemed to me that the judges in the court of appeal at the Arctic case were particularly unimpressed with HMRC's view that a wife's contribution to a business was less because she was working on the admin and giving support in different ways.

There does seem to be a fundamental difference; for divorce settlement purposes, Mrs MacFalane was given her fair share of her husbands's income. For tax purposes, if he paid her from the partnership, there would be a settlement. HRA says an individual is entitled to fair treatment, fair according to what?

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By carnmores
30th May 2006 15:50

Nichola can you clarify one point for me
sorry for being dumb

but

what is the tax treatment re the £250k (on the divorce) on Mr & Mrs McF

then i can compare one t'other


ps

how do you view the monies awarded - are they compensation for services previously supplied, compensation for loss of compensation for services still to be provided or a bit of both in which case how do we divide them, or something else?

fun isnt it!

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Dennis Howlett
By dahowlett
24th May 2006 17:18

So what about non-married partners?
Given the growth in life partnerships between men/men, women/women, men and women as compared to marriage, I'm wondering how the law could be amended to provide similar protection for these alternative forms of relationship.

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By carnmores
25th May 2006 18:31

and as for the noble baroness' comments
i dont suppose that equalisation of property had anything to do with DD/CTT/IHT; however and for whatver reason she appears to succinctly correct with the possible exception of her comments on gender roles

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By carnmores
25th May 2006 15:52

Nichola can you clarify one point for me
most of these settlements are post decree nisi , so are you sure that there is a problem in that respect at all.

even some of the daft old buggers who sit in this country's wonderful courts would be hard pressed to claim settlement under the taxes acts

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By carnmores
25th May 2006 15:47
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