Dealing With Lump-Sum Orders in Divorce
As well as the official legal aspects associated with divorce (eg obtaining a decree nisi), there are also usually financial negotiations which need to be concluded.
If an informal arrangement is not deemed sufficient, it may be necessary to go to court to obtain a financial order, such as a periodic payment order or a lump sum order.
What is a lump sum order in divorce?
As the name suggests, a lump sum order normally requires one of the divorcing parties to pay a lump sum of money to their former spouse. This is a court order which needs to be approved by a family law court. It can be issued in accordance with section 23 of the Matrimonial Causes Act 1973.
A lump sum order is commonly used where one party remains in the matrimonial home (often the mother and children), where the property is transferred into their name in exchange for a lump-sum payment to the other spouse.
A lump-sum payment usually forms part of a divorce settlement, which will be further reaching and involve the separation of more money and assets, such as pensions, savings, debts and maintenance.
Who is entitled to a lump sum order?
When making a lump sum order, courts will generally take into account the needs and financial resources of both parties, to ensure that any such order is as fair as possible.
Section 25 of the Matrimonial Causes Act 1973 lists some of the factors which a court should take into consideration, of which the primary should focus on the welfare of any children under the age of 18, but which also include:
- the income, earning capacity, property and other financial resources which each of the parties to the marriage has or is likely to have in the foreseeable future;
- the financial needs, obligations and responsibilities which each of the parties to the marriage has or is likely to have in the foreseeable future;
- the standard of living enjoyed by the family before the breakdown of the marriage; and
- the age of each party to the marriage and the duration of the marriage.
Although there is never an automatic entitlement to a lump sum order, courts will generally try and follow the overarching objective of fairness, whose three principles are set out in the case of Miller v Miller as:
- Needs – eg housing and financial needs
- Compensation – aimed at redressing any significant prospective economic disparity between the parties arising from the way they conducted their marriage (eg if the husband was able to progress in his career while the wife put her career on hold in order to bring up the children)
- Sharing – the starting point for working out how to divide up finances is that any matrimonial assets should be shared out equally (whether these are personal or business assets)
Pros and cons of a lump sum order
Financial orders generally involve either initial transfers of assets (eg lump sum order and ownership of property) or ongoing payments (eg maintenance payments and share of pension payments) – or a mixture of both.
A large enough lump sum order, combined with a clean break order, can effectively end the relationship entirely from a financial perspective.
But the downside is that, if circumstances change for one party (eg they win the lottery), once a clean break order has been made, the other party will generally be unable to make any claim.
How do you obtain a lump sum in divorce?
Sometimes the divorcing couple will be able to reach an agreement as to an acceptable sum themselves (eg through mediation), in which case this just needs to be drawn up into a legal order by a solicitor and sent off to the court to give its stamp of approval.
However, if negotiations are unsuccessful, it may be necessary to apply to the court for a financial order. Court proceedings will ensue and the court will then decide on an acceptable lump sum order and/or a periodical payment order.
Lump-sum payments may be made in a single payment, divided into instalments or arranged as a deferred payment.
Courts cannot make interim lump sum orders – so it can only be obtained after the decree nisi is in place.
Is a lump sum payment in divorce taxable?
In general, financial settlements – including lump-sum payments – are exempt from tax.
The main tax which needs to be considered for divorcing couples is Capital Gains Tax (CGT).