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August 2007

What can become Relationship Property?

The risks of intermingling

Generally all property acquired after a relationship begins is relationship property pursuant to the terms of the Property (Relationships) Act 1976 (the “Act”). However there are exceptions to this and one of those is the ability to acquire separate property during the course of a relationship even though that relationship may have existed for several years.

The Act provides that some limited forms of property acquired from third parties during the course of a relationship can be separate property. In particular, the following, if acquired from a third party (ie not the other spouse/partner) are separate property:
1. Property acquired by inheritance; or
2. Property acquired by survivorship; or
3. Property acquired by gift; or
4. Property acquired because the person receiving the property is a beneficiary under a trust which has been settled by a third person. 
It is to be noted, that in terms of the fourth category, property acquired by virtue of being a beneficiary under a trust that is settled by either spouse/partner will not be separate property according to the provisions of the legislation.

The Act goes on to provide that the property listed in numbered paragraphs one to four above will not be relationship property unless, with the express or implied consent of the spouse/partner who received it, that property (or the proceeds from the sale of that property) have been so intermingled with other relationship property that it becomes unreasonable or impracticable to regard that property (or the proceeds) as separate property.

A common example is where one spouse/partner receives an inheritance. If that inheritance is then banked into a joint bank account (for example by transfer from a solicitor trust account) then depending on what happens with the funds in that account, an intermingling argument could arise. It would be a question of fact as to whether it is possible to still ascertain the distinct sum that was banked in. However, if there has been a series of further deposits and withdrawals and use of the funds then it is possible to argue that intermingling has occurred and that separate property is now lost.

It is possible to protect an inheritance from intermingling by banking it into an account in the sole name of the spouse/partner receiving the inheritance. However, this then prevents free use of those funds as the receiving spouse/partner will always need to be aware of not using the funds in such a way as to suggest they have been intermingled. For example, it may prevent the spouse/partner receiving the inheritance from using those funds to reduce the mortgage on the family home.

Even though a marriage/de facto relationship may have existed for several years, it is nonetheless possible for the parties to enter into a Contracting Out Agreement to protect that asset from an intermingling argument. In order to be binding, the Agreement must be in writing and each party must receive independent legal advice before signing the Agreement. Such an Agreement can be useful if the inheritance is sizeable, or the relationship is relatively new, or there is a possibility that the relationship may end in the future.

It is important to note, that if a home or chattels are received from a third party by one of the methods outlined in paragraphs one to four above, and that home/chattels are used as the family home or family chattels then those items will automatically become relationship property and therefore subject to the equal sharing provisions of the Act, unless the parties enter into a Contracting Out Agreement preserving those assets as the separate property of one of the parties.

The risks of intermingling are significant. Discuss these matters with us beforehand, not after intermingling has occurred.