Liferents are a useful tool for future planning. They can allow for protection of assets for the next generation while still allowing the asset to be used and enjoyed. What happens to assets with a liferent if there is a subsequent divorce? Are liferents matrimonial property?
The recent case of Kelly v Kelly [2021] considered the nature of liferents in the context of financial provision upon divorce.
Background
Mr and Mrs Kelly lived together for a number of years before they married. Mrs Kelly had children from a previous relationship.
After the relationship began with Mr Kelly (“the husband”), Mrs Kelly (“the wife”) sold a flat that she owned. She used the equity from the sale of her flat, together with some inherited funds and a gift, to purchase a subsequent property (“the house”). The house was purchased in her sole name.
Some time after the purchase of the house Mr and Mrs Kelly married. After a few years, the wife re-mortgaged the house. At that time the title to the house was changed to be in the joint names of the couple.
Later still the couple decided to transfer ownership of the property to the wife’s children. But they reserved for themselves what is called a liferent interest in the property. This meant that while the wife’s children owned the asset, the couple were given the right to live there until death or until they decided to vacate voluntarily.
The couple separated in 2010 and the wife asked that the husband vacate the property, which he did.
The husband raised an action of divorce and requested payment of a capital sum of £100,000 from his wife.
Are liferents matrimonial property? The arguments
The husband argued that the market value of the property without a liferent was around £190,000. With a liferent attached, the house had a value of around £115,000. He, therefore, argued that the value of the liferent was the difference between the two, namely £75,000.
The husband argued that:
- the liferent constituted matrimonial property,
- its value should be taken into account in calculating the pot of matrimonial property,
- how that property would be divided would be a matter for the court to decide after hearing evidence.
The wife argued that the liferent interest existed regardless of the separation and any divorce. If she chose to leave the house or died, her husband would be free to continue to live there in terms of the liferent. She therefore argued he had lost “nothing”; the liferent should be excluded from the pot of matrimonial property for division.
The wife could have asked the court to order a transfer of the liferent to her sole name. She had not sought that within her case deliberately in order to support her argument that the husband was not losing anything upon the divorce if the liferent remained in place.
Are liferents matrimonial property? The court’s reasoning
The court decided that the wife could not look to enjoy the liferent by excluding the husband from the house while at the same time failing to seek transfer of the liferent so that she did not have to account for its financial value in the divorce.
The court accepted the husband’s argument that the value of the liferent constituted “property” for the purposes of the 1985 Family Law (Scotland) Act. Therefore, the liferent had to be dealt with in a similar way to the matrimonial home by way of sale, transfer or renunciation.
If the court did not regulate the ownership of liferent on divorce then it would remain the joint property of the parties. This is not in accordance with the “clean break” principle set out in the legislation.
The sheriff described the wife’s argument that the parties should be left as joint owners of the liferent after divorce as an “ill-advised scheme”.
The implications
The court decided that liferents are matrimonial property. On the basis that the liferent should be included as matrimonial property to be divided, there are two options:
- either the wife could ask for a transfer of the liferent, or
- the husband could ask to be ordered to renounce his interest in the liferent within a specified period in exchange for a payment of capital.
This issue, together with the correct way to value the liferent is still to be decided or agreed between the couple.
Granting a liferent is a good way to make provision for the future. Couples doing this should also consider what might happen in the case of a separation. Entering into an agreement (covering what would happen with the liferent in a separation and how it would be valued) at the same time as granting the liferent would be sensible. Advice from both family and personal lawyers is recommended.
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