Divorce: an international affair

An oft-used trope in matrimonial circles is that London is ‘the divorce capital of the world’. There is good reason for this, with the English legal system looking much more favourably on the financially weaker party compared to other jurisdictions. This approach has its origins in the House of Lords decision in the matter of White v White [2000], which epitomised the considerable freedoms given to English Family Courts, when it comes to the sharing of assets post-divorce, to ensure the two main guiding principles of equality and fairness are achieved.

For example, Judges in England treat the traditional ‘bread winner’ and ‘homemaker’ roles on an equal footing. Further, they do not necessarily exclude non matrimonial assets from a divorce settlement (e.g., inherited assets or those owned before the marriage) if both parties’ reasonable needs cannot be met by the ‘matrimonial pot’ of assets. The 2022 introduction of ‘no-fault divorce’ (i.e., blame is not apportioned to either party for the breakup) in the UK now provides a less confrontational option for couples, which is not available in many geographies.

In an upwardly mobile world, where it is not unusual for spouses to move internationally and reside and work in different countries (sometimes even different to each other), divorce can result in a jurisdictional race, with each party trying to file for divorce where it would be most beneficial for them. In these international cases, unsurprisingly, financially weaker parties are more likely to favour their divorce case being heard in England.

In the remainder of this article, we set out the aspects of divorce cases with an international element, where forensic accountants are well placed to provide accountancy support, be that as a named expert witness or using their expertise in an advisory capacity.

Further, due to the myriad of financial issues that can arise during a divorce, we also touch on other accountancy specialisms that may be needed by either or both parties. Should such a need transpire, the parties should bear in mind that a forensic accountant engaged as an expert witness must maintain an independent position, which may preclude them from providing some aspects of accountancy advice, particularly if it is to just one of the parties.

International asset tracing

A significant problem during the early part of matrimonial proceedings, particularly in international cases with significant assets involved, is establishing the actual assets the parties own, both from a valuation and location perspective. Parties can sometimes be best described as ‘less than forthcoming’ when obligated to honestly disclose their assets.

Forensic accountants often need to tap into their global network, using various contacts and research tools at their disposal, to undertake comprehensive international asset tracing exercises to identify shares in businesses, investments, pensions and property held by specific individuals.

Such exercises can be undertaken as either a named expert or in an advisory capacity. On occasion international asset tracing is undertaken for a party before they have even started the divorce process, if there are serious concerns that a spouse will not be transparent about the assets that they own. Such a strategy can reap huge dividends, with the respondent’s honesty instantly put into question when it can be evidenced to the Court that they have not disclosed either all their assets, and / or the true value of their assets.

Expert witness services

Expert witness services in matrimonial cases are the ‘bread and butter’ of a forensic accountant with experience in the Family Court arena, where it is common for them to act as either a party appointed, single joint or shadow expert. Whether it involves international or wholly domestic assets, typical instructions a forensic accounting expert witness may receive include:

• valuing the business interests of the parties, usually being shares in companies or interests in partnerships
• assessing the impact of taxation on the net value a party would receive, were they to sell or transfer business interests
• reviewing the liquidity of businesses and identify any surplus assets (i.e., identifying what can be extracted from a business for settlement without adversely impacting its day-to-day operations)
• identifying the sustainable income (both gross and net of tax) that the parties can likely derive from the business on an annual basis going forwards.

On occasion, certain niche areas may arise for forensic accountants to tackle, such as identifying and quantifying asset stripping, opining on passive growth scenarios or assessing the quantum of post separation accruals.

A forensic accounting expert witness’s prime responsibility is to assist the Court, simplifying complexity, setting out reasoned logical and evidenced opinion, and reaching conclusions in a straightforward and easily understandable manner. This mindset should not only apply to the delivery of Court compliant reports, but also to any subsequent response to questions from he parties, expert joint statements or when taking the stand as an expert witness in Court.

Tax planning

Divorces inevitably result in some kind of asset division, sale or transfer and ensuring this is accomplished in a tax efficient manner can make an enormous difference to the size of each parties’ share of the ‘matrimonial pot’ they eventually receive.

Anything with an international angle has long been an area of special interest for HMRC. Tax, by its very nature, can be something of a minefield when factoring in matters such as residence, domicile, offshore business or personal structuring issues, which all significantly add to the complexity. Very often, taking advice at an early stage in divorce proceedings is critical in determining the optimal timing for any transfer or disposal of assets. It is essential to understand the tax implications of the use of funds held offshore to satisfy a financial settlement, as significant tax liabilities can arise if this aspect is not reviewed.

It is also worth noting favourable changes to UK tax that became law in April 2023. Divorcing spouses are now able to transfer assets between each other up to three years after the tax year that they stop living with each other, without having to consider capital gains tax (although this time period would end earlier if the court pronounces the final order / decree absolute). Previously such transfers had to be completed by the end of the tax year in which the couple stopped living together. However, vigilance must be maintained in respect of international tax law, as overseas jurisdictions may not recognise such exemptions.

Tax specialists can provide guidance on minimising tax liabilities on divorce, quantifying the tax exposure from the proposed settlements to assist the parties in reaching a conclusion.

Tax resolutions

A lack of expert advice in respect of international and / or domestic taxation issues, be that historical matters or those relating to the division of assets upon divorce, often leads to tax errors (especially as already complicated tax rules evolve rapidly) and hence HMRC tend to invest their time in reviewing offshore issues.

However, disclosures to HMRC to rectify tax issues are not straightforward. An international element adds to the complexity and brings in additional issues such as the number of past years to consider, the level of penalties and potential mitigation factors. This in turn impacts on what documents and information HMRC can legitimately demand when exploring what has been, or needs to be, disclosed.

An experienced Tax Resolutions specialist can provide expertise, by way of expert opinion or advice, on matters such as:

• disputes with HMRC in respect of powers used to demand information
• disputes over tax assessments for past years (known as discovery assessments)
• disputes over penalties, which can be 200% of the tax owed where offshore matters are concerned, more in some rare circumstances
• professional negligence claims where a person with an offshore structure was not properly advised.

Raising capital for settlement

With the parties in a divorce usually aiming for a clean break (i.e., no financial ties post settlement), there may be a need to release cash tied up in international or domestic assets to fund a settlement.

All or part of a business may need to be sold, in which case a corporate finance specialist would likely be well placed to support business owners in selling their interests in domestic and cross-border markets, or selling to private equity and management teams. Alternatively, an insolvency specialist could assist in executing a solvent liquidation of a business, if this is perhaps the most appropriate strategy.

One of the parties may be looking to raise debt or equity to fund a settlement, particularly if there is an asset that they are keen to keep post-divorce. A debt advisory specialist would seek to align funding solutions with specific objectives, identifying possible debt solutions and assist in navigating the hurdles of a chosen solution.

Wealth management

It is not uncommon during the course of a marriage, for one of the parties to have little or no involvement in the management of the family finances. Upon divorce they might find themselves with a plethora of assets of substantial value in various international jurisdictions, that they now have the responsibility for, but have little idea themselves as to how to best manage them.

Financial planning specialists, typically an independent financial advisor (IFA), can provide financial coaching, impartially advising individuals on their different options and modelling the potential outcomes of different strategies. They should be able to deliver well researched, unbiased solutions across the whole international market. Also, where a divorce settlement has resulted in a pension sharing order, they can provide advice on the best methods of implementation.

Final thoughts

Navigating a divorce can be a complex, emotional, and painful process and that is before you even start to consider finances. This is magnified when there are international complexities. parties with the numerous accounting issues that can arise upon divorce.

For more information, please contact Martin Chapman or John Cassidy.

This article was first published in the Expert Witness Journal August 2023.