Law Articles

How are post separation bonuses treated by the Family Court on divorce and dissolution? 01/06/2022

There is no formula to be applied when it comes to dividing family assets on divorce and dissolution. Every case is different. The outcome will depend on several factors such as: the length of the relationship, the parties’ ages, whether there are any dependent children of the family, the standard of living during the relationship etc. Although the Matrimonial Causes Act 1973 sets out a non-exhaustive list of factors to consider at Section 25, the interpretation of the law has changed over the years, so we look to previous case law as guidance on how future cases are likely to be determined by the courts.

In general, the court’s approach for division of assets is that the financially superior party will pay to the financially weaker party the higher of:

(a) an equal share of the marital assets (any assets accrued during seamless cohabitation and marriage/civil partnership); or

(b) a sufficient sum to meet the financially weaker party’s reasonable needs, factoring in affordability.

The court’s fundamental aim is to achieve a clean break to enable financial independence for couples as soon as possible, without undue hardship. Achieving a clean break is easier to achieve in high-net-worth cases where the matrimonial pot can often easily support two households at the standard of living the couple is accustomed to. It can be tricker to achieve a clean break where the matrimonial pot does not stretch that far.

Treatment of post separation bonuses in the Family Court has considerably varied over the years. In some cases, bonuses awarded within 12 months of separation have been treated as matrimonial assets to be shared between the parties. In other cases, the court’s view has been that all post separation assets should be excluded from the matrimonial pot, although the financially weaker party in these instances could be awarded an additional amount of maintenance to ease their transition to independence. In other cases, the court has found that spouses should receive a decreasing percentage of bonus payments awarded post separation, as well as any tailing-off deferred bonuses awarded during the relationship. Other cases resulted in there being no distinction drawn between assets gained post separation to the date of trial, if the financial arrangements adopted by the parties had been a continuation of their financial arrangements prior to separation. In some cases, the bonuses awarded post separation were used to top-up the financially weaker party’s maintenance where it was found that the receiving party’s needs could not be met by the payer’s basic salary, particularly if the payer’s bonuses were historically used to meet irregular or unexpected but necessary expenses.

With so many contradictory approaches about how post separation bonuses should be treated, the division of bonuses frequently becomes a contentious issue for many families.

There is now clear guidance that post separation earnings (beyond the date of trial) should not be deemed assets to be shared (E v L [2021] EWFC 60). In summary, the Family Court found that, whilst bonuses awarded during the marriage should be deemed capital marital assets and be shared, bonuses awarded after separation (beyond the date of trial) should not be deemed to be capital marital assets and therefore should not be shared. However, those bonuses which were awarded during the marriage but not yet vested (and very probably including those to the conclusion of any final financial order) will be deemed marital assets for sharing. But, if the financially weaker party’s future capital and income needs cannot be met by sharing half the marital assets, including deferred bonuses awarded during the marriage, then post separation income (including potential bonuses awarded post separation) can be used to pay maintenance to the financially weaker party or as an additional lump sum to meet their future financial needs. The period of maintenance, including the years of bonuses to be used, will depend on when the receiving party can become financially independent.

Whether a couple is negotiating a financial settlement, or the Family Court is making a final financial order, it is important to be mindful of sharing the risk associated with various types of assets and income. For example, if too much of the safer capital (like cash savings) is paid in lieu of any share of deferred bonuses, it is important to be aware that the value of deferred bonuses can fall or be lost altogether if the relevant employee leaves. Once a final financial order is made, it is very difficult to revisit the terms of it. Assessing the risk structure, as well as the overall quantum, should therefore be considered very carefully before a final order is made.

For further information and advice on this issue, and other family law issues, please contact us for a free initial consultation on 01992 306 616 or 0207 956 2740 or email us.