Forty percent of people are relying on potential inheritances to fund their retirement, according to research conducted for Hargreaves Lansdown. Although this is a risky strategy, the reality of the astronomical rise in property prices over the past 30-odd years has meant many of the baby boomer generation now have million-pound plus legacies to hand down to their children and grandchildren, who are struggling to put away money for retirement or purchase a home of their own.

Given the above reality, when it comes to negotiating a financial settlement following divorce, those who have or expect to inherit considerable wealth will naturally attempt to ensure that it is classed as non-matrimonial, and separated out of the asset pot to be divided.

Is an inheritance classed as matrimonial property?

In the absence of a Pre or Post-Nuptial Agreement, assets acquired during a marriage or civil partnership are likely to be considered matrimonial property and notionally added to the pot that will be divided up between a couple upon divorce or dissolution. However, inheritances are treated differently in that they are not automatically deemed matrimonial property, but this does not mean that they will not be included, if certain criteria are met.

The separation of inherited wealth from matrimonial property was confirmed in the landmark family law case of White v White [2000] UKHL 54; [2000] 3 WLR 1571. Lord Nicholls examined the issue of property acquired during the marriage by one spouse by gift or succession or as a beneficiary under a trust (which he deemed ‘inherited property’ for the sake of brevity).

“This distinction [between inherited property and property acquired before the marriage, and matrimonial property] is a recognition of the view, widely but not universally held, that property owned by one spouse before the marriage, and inherited property whenever acquired, stand on a different footing from what may be loosely called matrimonial property. According to this view, on a breakdown of the marriage these two classes of property should not necessarily be treated in the same way. Property acquired before marriage and inherited property acquired during marriage come from a source wholly external to the marriage. In fairness, where this property still exists, the spouse to whom it was given should be allowed to keep it. Conversely, the other spouse has a weaker claim to such property than he or she may have regarding matrimonial property”.

Does that mean my inheritance is safe from the divorce financial settlement?

Not necessarily. The Court must consider all the factors under section 25 of the Matrimonial Causes Act 1973, namely:

• the income, earning capacity, property, and other financial resources each party has access to now and in the reasonably foreseeable future;
• the financial needs, obligations, and responsibilities of each of the parties now and in the reasonably foreseeable future;
• the standard of living enjoyed by the family before the breakdown of the marriage;
• the age of each party to the marriage and the duration of the marriage;
• any physical or mental disability of either of the parties to the marriage;
• the contributions that each of the parties has made or is likely to make in the reasonably foreseeable future concerning caring for any children of the marriage;
• 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; and
• the value of any benefit one party will fail to acquire due to the divorce.

The brutal reality is that if the needs of both parties cannot be met by sharing the matrimonial resources available to them both, without recourse to all or part of the inheritance then it is likely that the inherited assets will be included in the matrimonial pot to be divided between the couple.

What other factors could lead to my inheritance becoming matrimonial property?

Several factors could lead to the Court finding that an inheritance is likely to be considered to be matrimonial property rather than separate property, including:

• The length of the marriage and intermingling of assets. The longer that you and your spouse have been together, the more likely the inheritance has intermingled with the matrimonial property, to the point where it is impossible to separate it out. For example, often an inheritance is used to make improvements to the family property, which is difficult to separate from the overall value of the home. However, if funds from the inheritance was used to purchase a buy-to-let property and only the inheriting spouse had their name on the title deeds, then it is much easier to declare that the buy-to-let sits outside the matrimonial property pot, if the matrimonial pot is sufficient when divided to meet their needs.
• Matrimonial home. If an inheritance is used to purchase the family home itself the Court is more likely to view it as matrimonial rather than separate property.

There are no overarching rules as to whether an inheritance will be treated differently to matrimonial property. Everything will depend on whether, after consideration of the section 25 factors, a fair settlement can be achieved without recourse to the inherited assets or funds. Fundamentally, if the needs of the parties cannot be met by dividing the matrimonial property and assets, then inheritance will almost certainly be added to the matrimonial pot, especially if there are young children involved whose needs will be considered a priority.

Final words

Drafting a Pre or Post Nuptial Agreement will provide an opportunity to protect your inheritance from becoming part of any financial settlement following a divorce. Although not legally binding, if certain safeguards are in place, the agreement is fair and reasonable, and both parties have had the opportunity to take full and independent legal advice involving disclosure on both sides, the Court will give the contents of a Nuptial Agreement considerable weight and are more than likely to uphold its content.

To discuss any points mentioned in this article, including Pre or Post Nuptial Agreements, please contact our office.

Edwards Family Law is a niche London-based firm specialising in high-net-worth divorce and international family law. To find out more about divorce and financial settlements, please telephone +44 (0)20 3983 1818 or email contact@edwardsfamilylaw.co.uk. All enquiries are treated in the strictest confidence.