Sweeney: room for manoeuvre
A recent decision on financial provision develops the law on the treatment of future contingent tax liabilities as set out in Sweeney v Sweeney
The recently published decision of Lord Tyre in the case SW v TW  CSOH 136 (8 July 2013) raises interesting issues in financial provision on divorce, adding a little to the jurisprudence on economic advantage/disadvantage and source of funds, but most particularly developing the law relating to the treatment of future liability to capital gains tax.
The parties to this action of divorce were married on 18 May 1996, and the relevant date was 29 January 2010. The assets at the centre of the disputed issues were the former matrimonial home in Aberdeenshire and the parties’ shareholdings in a private limited company (referred to as X Ltd). As her primary position, the wife pursuer sought transfer to her of the former matrimonial home and a capital sum payment. As his primary position, the husband defender sought transfer to him of the wife’s shareholding in X Ltd.
Economic advantage/disadvantage and source of funds
Both parties advanced arguments for unequal division. X Ltd was founded by the defender and a business associate prior to the marriage, each of them having a 50% shareholding. At the date of the marriage the whole company was worth £40,000. Early in the marriage the defender transferred to the pursuer a 24% shareholding, his remaining shareholding obviously remaining non-matrimonial. The company had an appropriate valuation date value of £9,053,937, of which the pursuer’s 24% was matrimonial property and 26% comprised the defender’s non-matrimonial wealth.
The pursuer advanced a case in terms of s 9(1)(b) of the Family Law (Scotland) Act 1985 that she had made significant contributions to the success of X Ltd, including in recruitment, provision of consultative support, acquisition and development of new business premises, marketing and assistance in management, and was therefore unable to advance a career of her own. She contended that the court should add to her share of the matrimonial property a percentage of the increase in value of the defender’s shares in X Ltd during the course of the marriage.
The defender denied that there had been contributions of such significance and, esto there had been, denied that they had contributed to the company’s success, contending instead that the pursuer had been unfairly advantaged by his financial support while she retrained for a new profession. Unsurprisingly, he advanced an argument in terms of s 10(6) of the 1985 Act, seeking a departure from equal sharing in recognition that the most significant matrimonial asset was owned by him at the date of marriage.
Lord Tyre found that any economic advantage to the defender from the pursuer's involvement in X Ltd which was reflected in the value of his non-matrimonial shares was at the very least balanced by the economic advantage to the pursuer from her own share ownership, noting that “the profits of X Ltd were applied, during the marriage, to enhance the parties’ lifestyle and not retained outside the matrimonial commonwealth”: para 43. Likewise, in relation to the defender’s source of funds argument, he found that it would not be appropriate even to take account of the relatively minimal value of the shares in X Ltd at the date of marriage, as the transfer was made with the purpose of benefiting the family finances as a whole and was not intended as an act of benevolence to the pursuer at the expense of the defender, largely for reasons of income tax efficiency. Equal sharing was therefore appropriate in relation to these matters.
Future contingent capital gains tax
The defender claimed for an adjustment in the sharing of capital to take account of his future liabilities in respect of capital gains tax on sale of any shares transferred to him by the pursuer, founding upon either the special circumstances provisions of s 10(1) or as a factor relevant to reasonableness in terms of s 8(2). The court did make an adjustment in respect of the defender’s prospective liability to CGT on his future disposal of the shares received by him in terms of the property transfer order granted in his favour, a decision which may at first seem surprising, given the widely held view that the decision in Sweeney v Sweeney (No 2) 2006 SC 82 precludes such an adjustment. The adjustment was made because his Lordship was satisfied on the evidence that a sale of those shares was by no means hypothetical, as the defender and his fellow shareholder wished to sell their shares, and that the sale would probably take place sooner rather than later.
On a careful reading of paras 15 and 16 of Sweeney (No 2), it is clear that that judgment envisages that there would be cases in which future contingent tax liabilities would be taken into account, and indeed Lord Tyre quotes from that judgment the explicit acknowledgment that “there are other stages at which the actual or foreseeable incidence of tax and other liabilities or costs upon any realisation or disposal can be brought into account”.
Accordingly, the court regarded the current value of the pursuer’s shares as including an element of locked-in tax liability whose burden she would not bear on transfer (having the benefit of holdover relief for that transaction), and was persuaded that those special circumstances justified making a 10% deduction from the value of the shares being transferred.
In practical terms, the judgment in SW v TW is the first case to move along the spectrum envisaged by the court in Sweeney (No 2). It may not mark a departure from the jurisprudence of that decision, but it is the first instance in which advantage has been taken of the breadth of the dicta.
As such, practitioners must be aware that it is inappropriate to tender simplistic advice that future potential liability to CGT is irrelevant in negotiating or litigating financial provision on divorce. However, it is to be hoped that rather than sparking a rash of litigation, this development will be another factor which can be used creatively in negotiating settlements. Time will tell.
Alison Edmondson is a director of Sheehan Kelsey Oswald, Family Law Specialists