The Court of Appeal (CoA) has upheld a financial remedy order (FRO), one that pierced a sham trust structure that was intended to hold one spouse primarily liable for a significant and uncertain tax debt. This ruling clarifies that a judge may fairly cap a spouse’s contribution to such liabilities when they are the result of one party’s dishonest financial conduct.
Facts:
The case concerns financial remedy proceedings following the breakdown of a marriage, primarily involving a dispute over assets valued at approximately £40m. A critical turning point in the litigation occurred during a preliminary hearing in 2024 when the Court determined that a legal structure known as the CN Trust was revealed to be a sham. This trust purportedly held 100% of the shares in a holding company, H (UK) Ltd., which in turn controlled various property development subsidiaries. The Judge ruled that these assets were not actually held by an independent trust but rather were, at all times, beneficially owned by the husband.
This finding of a sham structure triggered a significant and uncertain tax liability. Because the 2020 restructuring was now viewed as a personal redistribution of assets in favour of the husband, expert evidence estimated that HMRC could potentially demand a figure of between £6m and £30m in taxes, interest, and penalties.
The valuation of the property group was also heavily contested, as H (UK) Ltd. acted as a holding company for several entities, including PEL and HI Ltd., which, in turn, served as property investment vehicles. While a single joint expert originally valued the husband’s shares at roughly £25m, the wife successfully argued for an increase. A primary point of contention was a development known as ‘LR’. The expert had valued it as an incomplete project, but by the time of the trial, it had been completed and let for an annual rent of £2.75m—establishing a new valuation that was far higher than the expert’s projection. The Judge exercised his discretion to increase the valuation of LR by £8m, concluding that relying on an outdated, “incomplete” valuation would be artificial.
In contrast, the husband argued that the value of the subsidiary PEL should be reduced by £2m. He claimed that, because the Court had appointed receivers to enforce his payment of legal fees and maintenance, the company’s assets would be sold at auction for a lower price rather than as a going concern. He further argued that extracting money through receivership would trigger higher personal taxes. The Judge rejected this, noting that the receivership was only necessary because the husband had “egregiously” breached previous court orders. The Judge found that the husband had no intention of complying with his financial obligations and was attempting to use his own default to lower the valuation of his assets.
Decision:
The husband’s permission to appeal was denied. This means the original FRO made by HHJ Hess remains legally binding and in full effect, although the husband argued that the tax was a “matrimonial debt” and should thus be shared equally. The CoA disagreed because, as the husband was the “principal cause” of the problem, he should accordingly bear the greater share of the risk.
The husband complained that the Judge had “cherry-picked” by increasing the value of one property (LR) but not decreasing another (PEL). However, the husband could not claim a reduction in the value of PEL due to receivership costs, because those costs were “self-inflicted” by his own refusal to pay maintenance and court orders.
Implications:
The most striking implication is the Court’s willingness and ability to pierce the veil of complex trusts and corporate shells. If such a structure is found to be a “sham,” then the Court will not only treat those assets as belonging to the individual, but may also hold that individual solely responsible for the resulting tax “fallout”. This case confirms that, while assets are shared, any liability arising from dishonest financial engineering may not be distributed equally.
Traditionally, debts incurred during a marriage are considered “matrimonial debts” and are typically shared 50/50. However, this case reinforces a crucial exception – that of financial misconduct. The Court can deviate from an ‘equality of liability’ if one party is the “principal cause” of a debt through their own “turpitude” or dishonesty.
