On any divorce or dissolution, whether or not a business is involved, both parties are entitled to a fair and reasonable financial settlement.
There is a ‘checklist’ of issues that should be considered in every case which underpin the principles of any settlement.
They are set out in section 25 Matrimonial Causes Act 1925. They include:
- The income and earning capacity of both parties now and in the foreseeable future.
- The financial needs, obligations and responsibilities of both parties now and in the foreseeable future.
- The standard of living prior to the relationship breakdown.
- The age of the parties and duration of the marriage or civil partnership.
- Any mental or physical disability of either of the parties.
- The contributions of the parties to the welfare of the family.
- The conduct of the parties (in limited circumstances).
First consideration must be given to the welfare of any child under the age of 18.
Key issues generally
Most cases will include consideration of:
Housing needs
Assessing housing requirements for both parties and any children.
Income needs
Assessing how much income the family has, child support obligations and whether any additional payments need to be made from one party to the other.
Matrimonial assets
Assessing whether any of the resources could be regarded as ‘non matrimonial’ and so distinguishable from the resources generated by the couple together. This might affect how they are divided.
Complex assets
Assessing whether expert help is needed to better understand a resource and the options for dividing it on divorce or dissolution. This might include pensions, businesses, tax, trusts or overseas assets.
Immediate, medium, and long term issues
Don’t ignore resources such as pensions. Retirement may seem a long time away, but pensions are a valuable resource and often overlooked.
What is achievable?
Are there obstacles to securing an interest in a particular resource, e.g. is it overseas/is there a need for international legal advice? Is the asset illiquid/can it be sold or transferred or are there restrictions/can they be overcome? Are there third parties with interests in that asset or resource, and do they need to be factored into the solution?
Additional key issues for business owners
How the business is held is an important consideration.
Other key issues include:
Classification of matrimonial or non-matrimonial property
In financial proceedings following divorce or dissolution, assets are typically classified as either matrimonial or non-matrimonial property.
Matrimonial property includes assets acquired during the marriage, while non-matrimonial property often consists of assets acquired before the marriage or through inheritance or gifts.
Determining the classification of company assets depends on various factors, such as when the company was established, whether marital funds were invested in it and whether it was used as a resource during the marriage.
This is an important distinction, as generally only matrimonial assets will be divided between the parties if there are sufficient other resources to meet both parties’ needs.
Non-matrimonial assets will only be included in the pot to be divided if they are required to meet needs.
Learn more about how pre-marriage businesses are treated.
Post-separation accrual
Post-separation accrual refers to the increase in value of assets after the date of separation. Determining the fair allocation of post-separation accrual can be a highly contentious issue, especially when it comes to business interests which can fluctuate in value over a relatively short term. The court may consider factors such as the contributions of each spouse to the business's growth during the separation period.
It may be that an expert is required to value the business as at the date of separation and again at the date of trial so that a comparison can be drawn. Read more on company valuations. The court may then opt to ringfence the post-separation accrual or apportion it between the parties depending on the circumstances of the case.
Liquidity
A key issue when dividing assets during divorce or dissolution is liquidity. Illiquid assets, such as shares in a privately held company, may require creative solutions to ensure both parties receive their fair share without disrupting the business's operations. This could involve staggered payments, asset swaps, or the sale of certain assets. It is important to carry out an assessment of liquidity when assessing the value of a company that is not being sold, as trading businesses are often required to retain working capital to meet ongoing and future expenses and to aid with cashflow.
Transferring shares
Transferring shares in a company from one party to another may be part of the financial settlement. However, this process must comply with legal and regulatory requirements, including shareholder agreements and the company’s articles of association. Valuing shares accurately and ensuring a smooth transfer is essential to avoid disputes and complications.
Issues can be complicated if it is unrealistic for the parties to continue in business together or if there are third party business owners. Learn more about relationship breakdown for business co-owners.
Discounts
In some cases, discounts may apply to the valuation of company shares. These discounts reflect the reduced value of shares due to factors such as minority ownership or limited marketability.
Understanding when and how these discounts apply is crucial to achieving a fair valuation of company assets and expert advice will be needed.
Tax
There are a number of taxation issues that can arise on the transfer or disposal of company assets. It is therefore important to obtain specialist tax advice before entering into an agreement with your spouse regarding the division of business assets on divorce or dissolution. The sale or transfer of shares, for example, can result in a capital gain that is taxed on disposal, and receiving shares can result in a stamp duty levy. In certain circumstances, a shareholder disposing of their shares can rely on business asset disposal relief, (formerly entrepreneurs’ relief), to reduce the rate of a capital gains tax charge.
Summary
Navigating the complexities of divorce and dissolution where one or both parties’ own business assets requires careful consideration.
Seeking professional advice from legal and financial experts familiar with both family law and business and accountancy can help couples achieve a fair settlement that protects their interests and preserves the viability of the business involved.
For further support on any areas discussed, please get in touch with our team of expert family law solicitors.
