When people in in business sectors such as IT and finance are paid bonuses, what happens to those payments in the event of a divorce settlement? The author of this article examines the situation. 

The following article, looking at an aspect of divorce law in the UK – the bonuses that are paid to people in area such as banking, IT and professional services – comes from Emily D’Eyncourt Harvey (pictured below), who is a solicitor at Taylor Walton Solicitors. The editors are pleased to share these important insights and invite responses. The usual editorial disclaimers apply. Email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com

Emily D’Eyncourt Harvey

Bonuses form a significant part of remuneration packages in industries such as finance, banking, tech and professional services. Bonuses are commonly discretionary and/or deferred in nature meaning that there is little certainty as to what may be received. They may also comprise share options and restricted stock units. Bonuses can be income and/or capital in nature and in some circumstances may have become mingled with other matrimonial assets such as pensions, for instance where individuals may have opted to pay bonuses into their pension during the marriage given the associated tax efficiency or to assist with clearing the mortgage on the family home. This can make bonuses difficult to deal with on divorce, given it is often a fact-specific exercise that requires professional advice.

How are bonuses dealt with on divorce?
Timing distinguishes how bonuses are dealt with by the family court when dividing the finances of divorcing parties. Bonuses that were awarded on the basis of work undertaken during the marriage will be considered matrimonial property. So too will bonuses which are awarded based on work undertaken during the marriage, even if that bonus is actually paid after parties have separated. When matrimonial assets are being divided on divorce, the starting point is an equal division. 

The dial can however be moved in one party’s favour particularly where this is required on the basis of need. Bonuses which are considered matrimonial property are therefore likely to be divided along with other matrimonial property. Bonuses which have been received during the marriage and mingled with matrimonial property will also be treated in this way. Likewise, if a bonus has been applied to clear (or assist with clearing) the mortgage on the family home during the marriage then it will be treated as part of the matrimonial capital; the family home is afforded special status on divorce.

Where a bonus has been paid post-separation and relates to work carried out after the end of the marriage, then it may be considered non-matrimonial property but this will depend on the circumstances of the case and some case law has suggested that post-separation bonuses should only be classed as non-matrimonial property if earned more than 12 months after separation. 

If the needs of the parties (and any children) cannot be met from the matrimonial assets alone, non-matrimonial property can be ‘raided’ where this is justified based on need, which may include a bonus which was earned and paid post-separation. A bonus might be considered a source of income which is available to the receiving party to pay maintenance to their spouse where this is justified by their need. 

When the court is satisfied that non-matrimonial property is to be retained as such, then it would still be considered a resource that is available to the receiving party, which the court would expect them to draw upon to meet their needs post separation. 

Courts are also likely to distinguish between bonuses which are certain and those which are discretionary or conditional in nature; professional legal advice will almost certainly be required to advise how the above will apply to individuals’ specific circumstances if they are contemplating divorce. 

Things become more difficult where bonus schemes and structures are complex and encompass restricted stock units or share options which vest in the future (often to encourage employee retention). In these circumstances there is likely to be little certainty as to the value of the shares at the point they will vest. It is necessary to consider tax consequences as well as the risk, uncertainty and volatility when dealing with the division of such bonuses. 

Disclosure
There is a duty of full and frank financial disclosure on divorce which requires parties to transparently disclose their assets, liabilities, income and financial circumstances. It is therefore worth noting that details of recent and expected future bonuses must be disclosed, along with payslips, the relevant employment contract and possibly documents setting out plan/scheme rules and vesting schedules. The receiving party should expect to provide this information, and the non-receiving party would be well advised to request it. 

Pre-emptive protection
Entering into a pre-nuptial or post-nuptial should be seriously considered where employment provides lucrative bonuses, individuals are marrying, and the intention is that in the event of separation, bonuses will be retained by the earning party. A pre-nuptial agreement entered into prior to marriage can define bonuses as separate, non-matrimonial property. A post-nuptial agreement can be entered into after marriage, including prior to divorce and could likewise help to ringfence bonuses. Agreements of this nature are not automatically legally binding but are often given significant weight and upheld if the terms are fair and they meet the other strictly prescribed legal criteria.  

Child maintenance
Separately, it is also worth noting that where parties have children, the child maintenance service (CMS) will include bonuses as part of a paying party’s gross income when they are calculating a child maintenance liability. CMS calculations are commonly based on HMRC records (usually a P60) from the previous tax year. Where a paying party’s income is more than £156,000 ($209,974) and “top up” maintenance is required, bonuses are also likely to be treated as part of their income.

Conclusion
Bonuses are challenging to handle on divorce. It is advisable to take early specialist legal advice prior to and during the divorce process to ensure that they are dealt with fairly, and in a way that also balances the nature and practical reality of the bonus schemes in question as well as the parties’ wider financial circumstances.