How to take into account Earning Capacity when you divorce

financial supportEarning capacity on divorce can be a powerful resource

Many separating couples in mediation seem to struggle with reaching a common understanding and approach about how to take into account differences in earning capacity when it comes to considering how to divide their capital to meet their housing needs and the question of spousal maintenance.

This brief article focuses on one particular scenario where there may be insufficient capital to rehome both parents, without having to raise a mortgage, and where one parent earns significantly more than the other parent because they have been the main breadwinner during the marriage whilst the other parent has been the main child carer resulting from choices they made during the marriage.

How would the court approach the question of a capital division and ongoing financial support for the lower earner?

The reader of this article is referred to an excellent and detailed Guide first published in 2016 and more recently in April 2018, owing its origin to the Law Commission’s observations in its 2014 report, ‘matrimonial property, needs and agreements’.

This document offers guidance on the overall objective for fair financial outcomes following separation and divorce.

The Law commission objective for financial orders/outcomes, following separation and divorce is to;

  1. meets needs to enable a transition to independence to the extent that is possible in the circumstances
  2. needs may well, and commonly do, provided justification for a departure from equal sharing.

The Law commission describes that objective as follows:

‘we conclude that the objective of financial orders/outcomes made to meet needs should be to enable a transition to independence, to the extent that that is possible in the light of the choices made within the marriage, the length of the marriage, marital standard of living, the parties expectation of a home, and the continued shared responsibilities (importantly, childcare). We acknowledge the fact that in a significant number of cases independence is not possible, usually because of age but sometimes for other reasons, arising from choices made during the marriage.

The family Justice Council endorses this objective. Indeed, this objective  is reflected in the well-known speech of Baroness Hale in House of Lords case of Miller; McFarlane;

‘of course, an equal partnership does not necessarily dictate an equal sharing of assets. In particular, it may have to give way to the needs of one party or the children. Too strict an adherence to equal sharing and the clean break can lead to a rapid decrease in the primary carers standard of living and a rapid increase in the breadwinners. The breadwinners unimpaired and unimpeded earning capacity is a powerful resource which can frequently repair any loss of capital after an unequal distribution…. Recognising this is one reason why English law has been so successful in retaining a home for the children…. The ultimate objective is to give each person an equal start on the road to independent living.’

Therefore, even though there may be sufficient capital to rehouse both parents, one parent may require more capital to rehouse them and the children and/or ongoing financial support, giving them time to adjust to independence (and build or rebuild their own earning capacity), given the fact that their earning capacity has and continues to be affected by their role as child carer. This lower earning capacity may translate into a lower borrowing capacity and therefore a need for a larger share of the capital for housing and/or it may mean ongoing spousal maintenance.

The reader is referred to the Compass guide on spousal maintenance for the kind of approach the court might take to decisions about spousal maintenance (distinct from child maintenance)

In mediation, the mediator will work with the separated couples’ expectations as well as the, the reality of their circumstances and legal principles at work since, although the couples own views are important, it is also important that a decision is reached that falls within the ‘shadow of the law’, reflecting the legal outcome and kind of principles a court would apply to meet this objective.

How to take into account Earning Capacity when you divorce