When divorcing spouses are in business together – who keeps the business?

divorcing couples in business together

When divorcing spouses are in business together – who keeps the business?

It is not uncommon for couples to be in business together. Sometimes they are equal partners in the business, both often bringing different skills, for example one an expert in sales and the other an expert in management. Sometimes one spouse is the main driving force behind the business, with the other taking a lesser role. Whatever the dynamic of the couple within the business, if they divorce, they are both usually worried about what will happen to the business and their role within it.

Partner Fiona Wood, who is one of the UK’s foremost experts at dealing with divorce cases where there are substantial and complex business assets, explains the options.

Under English divorce law a judge can order one spouse to transfer their shareholding in a company to the other spouse. A judge also has the power to order that a business is sold, as long as there are no third-party shareholders in the company, although this does not happen very often.

However, most divorces are not decided by a judge. Most divorcing couples reach a financial agreement, with the assistance of legal advice, and this includes those divorces where the couple are in business together.

Staying in business together

Some divorcing couples decide to stay in business together. This is often the case where the couple both have equally important roles in the business and taking either of them out of the business would damage it. It also happens when the couple already had a plan to build the business up with a view to selling it. This obviously works well where the couple are still on good terms.

Shareholders Agreement

A detailed Shareholders Agreement should be put in place by the couple when they divorce, if they did not already have one, to make sure that any disagreements that they have regarding the business going forward are dealt with fairly.

What if the couple both have important roles in the company, but one or both does not want to remain in business with the other? In this scenario one spouse often purchase’s the other spouse’s shares in the business. To do this the company and their shareholdings will have to be valued by an accountant within the divorce proceedings. The net value of the company, along with the non-business assets, will then need to be divided fairly between the couple.

Tax consequences

The tax consequences of the share transfer will also need to be considered and factored into the divorce settlement, as CGT is usually payable by the spouse transferring their shares not long after they have been transferred.

If both spouses want to retain the business to the exclusion of the other, a judge will have to decide upon this. Alternatively, the judge could order that the business is sold, so that neither retain it. In my experience it is very unusual for both spouses to want to retain a business and even if they do, it is usually the case that the business is not viable without one spouse, but is without the other, which decides the issue.

In most businesses owned by divorcing couples, one of the spouses plays a far more important role in the company and often owns more shares in the company than their spouse. In this scenario, the spouse with the more important role will retain the company as part of their divorce settlement, with their spouse transferring their shares to them. Again, the company will have to be valued within the divorce process to ascertain its value, the net value of the shares being transferred and the tax consequences of the share transfer.

The income that the spouse retaining the company will receive from the company going forward, compared to the earning capacity of the spouse leaving the company, is also an issue that will need to be considered. Sometimes the earning capacity of the spouse leaving the company will be considerably less than the salary and dividends that they received from the company. Again, this will have to be factored into the divorce settlement.

If you are a business owner and are experiencing problems in your marriage, it is important that you take advice from a solicitor who is experienced in dealing with businesses within divorce. Please get in touch today. We are here to help.

Can my ex make a claim against the assets and income I’ve generated since we separated?

business assets fiona wood

Can my ex make a claim against the assets and income I’ve generated since we separated?

Until a financial order is obtained within divorce proceedings either spouse can make a financial claim against the other. When considering what a fair financial claim is, a judge will look at all the assets owned by the couple at the time they divorce. What if one of the couple has significantly increased their assets since separation? Will their spouse benefit from this just because they did not divorce sooner after they separated?

Partner Fiona Wood, who is particularly accomplished at dealing with divorce cases where there are substantial and complex assets, explains further.

When marriages end the couple are not always in a rush to get divorced. Emotionally it is often a very difficult time and many people wait until after they have been separated for some time before formalising their separation by obtaining a divorce and a financial order within their divorce proceedings.

Until a financial order is obtained within divorce proceedings either spouse can make a financial claim against the other. When considering what a fair financial claim is, a judge will look at all the assets owned by the couple at the time they divorce. What if one of the couple has significantly increased their assets since separation? Will their spouse benefit from this just because they did not divorce sooner after they separated?

There are no strict rules regarding how a judge should divide the assets when a couple divorce

There are no strict rules regarding how a judge should divide the assets when a couple divorce, only guidelines. Judges therefore have a lot of discretion regarding the financial orders that they make. However, the main factor that judges must consider is the needs of the couple and their children (up to the age of 18). Need is usually having somewhere to live and money to live on, although how much is required to meet these needs will vary from case to case. If the couple’s needs can only be met by taking into account all of the assets, including those acquired after the couple separated, then all of the assets will go into the matrimonial pot for distribution between the couple.

Ring-fencing assets

If there are more than sufficient assets to meet the couple’s needs, it may be possible to ring-fence some or all of the assets that have been acquired after the couple separated. For example if one spouse started a new business after separation and at the time of the divorce this business had a significant value, if there are more than enough assets to meet the couple’s needs without taking the business into account, a judge could ignore some or all of the value of this business when dividing the other assets between the couple.

What if the asset existed at the time the couple were together, but it has increased in value significantly since separation? If the growth in value is just latent growth, such as an increase in value of a property owned by one of the couple as a result of a general increase in property prices, a judge is unlikely to say that this asset should be ring-fenced before the assets are divided between the couple.

If the growth in the asset since separation is as a result of significant efforts by one of the spouses since separation, for example a business increasing significantly in value over a period of time after separation due to a change in direction taken by the business owner, a judge may ring-fence some of the value in the business before the assets are divided between the couple. Some of the value of the business is likely to be included in the matrimonial pot as the business that existed at the time of separation provided a springboard for the growth of the business.

A judge’s discretion

When calculating how much should be ring-fenced, the Court of Appeal in Hart v Hart (2017) used both an arithmetical and a broad-brush approach to make this decision, which gives judges quite a large discretion regarding how they deal with this issue.

With regard to earnings that one spouse has earned after separation, again provided that there are sufficient assets to meet the couple’s needs without using money saved from post-separation income and bonuses, this money is likely to be ring-fenced. The case of Waggott v Waggott (2018) removed earning capacity from the matrimonial pot, allowing income received after separation to be treated differently if there are sufficient assets to meet the couple’s needs without having to use this money.

If you would like to know more about the issues raised here, please get in touch today. We are here to help.

The Millionaire’s Defence

the millionaire defence

The Millionaire’s Defence

What Is The “Millionaire’s Defence”?

When a couple get divorced they are both obliged to provided full financial disclosure. The “millionaire’s defence” was a term created following the divorce case of Mr and Mrs Thyssen-Bornemisza in 1985, when the very wealthy husband said that he did not need to provide full financial disclosure in his divorce proceedings as he had sufficient wealth to pay any reasonable sum that a judge ordered him to pay to his wife.

Partner Fiona Wood, who is particularly accomplished at dealing with divorce cases where there are substantial and complex assets, explains further.

What is the benefit of running this defence?

Many wealthy people would prefer not to provide full details of their wealth, which may include significant business assets and interests under family trusts. Successfully running this defence means that these details do not have to be provided. Furthermore, formal valuations are often obtained of business assets in divorce proceedings and not having to provide sufficient information to facilitate this and not having values attributed to these assets in court proceedings, which can be attended by the press, can have its attractions.

In what circumstances can I run this defence?

Firstly, you need to be very wealthy. Secondly, the sharing principle should not apply to your divorce. Since 2000, assets that have been acquired during a marriage are usually subject to the sharing principle when a couple divorce, provided both their needs can be met by doing this. Therefore if you are very wealthy, but much of your wealth was accumulated during the marriage, the Judge will want you and your spouse to provide full disclosure of all your assets and may also want experts to value these assets, if their values cannot be agreed by you and your spouse, as the judge’s starting point, when considering a fair settlement, will be an equal division of these assets.

In the 2013 divorce case of AH v PH, the husband stated that he had assets worth £76 million, which had been gifted to the husband by his very wealthy family before the couple married. The husband’s assets were considered non-matrimonial and therefore not subject to the sharing principle. The judge accepted that full financial disclosure was not required from the husband as the wife should receive a needs based divorce settlement, based upon what she needed to fund the purchase of suitable house and a capital sum to meet her income needs. The wife received £7.775 million.

Is the Millionaire’s Defence relevant to other relationship claims?

If an unmarried couple separate and they have children who are under the age of 18, the parent that the children live with can make a financial claim against the other parent for the provision of a house, a car and other capital needs until the children finish school or university, plus child maintenance. These applications are made under Schedule 1 of the Children Act. Whilst financial disclosure usually has to be provided by both parents in these proceedings, if the paying parent is very wealthy they may be able to rely on the Millionaire’s Defence.

In the case of A (A Child) in 2014, the mother made a Schedule 1 application and the father ran the millionaire’s defence. The father was a member of wealthy ruling family from a middle eastern country. The mother appealed the court’s decision on the basis that the court did not make adequate financial provision because of the father’s failure to provide full financial disclosure. The Court of Appeal rejected the mother’s appeal and confirmed that where there is significant wealth there is no need to examine in close detail the father’s financial resources.

It is fair to say that the Millionaire’s Defence will only be run successfully in a limited number of cases. However, for the very wealthy, who are keen to keep details of their wealth private, it is a defence that they may want to consider using.

If you would like to know more about the issues raised here, please get in touch today. We are here to help.

10 top tips for business owners facing divorce

top 10 tips for divorcing business people

10 top tips for business owners facing divorce

Divorce is never easy, but it can be more complicated when you’re a business owner. Partner Fiona Wood, who is particularly accomplished at dealing with divorce cases where there are substantial and complex assets, offers her advice.

1 Don’t panic! The divorce process is NOT designed to damage a business so that it is no longer viable. The income produced by the business will often be the business owner’s main source of income both before and after divorce. This income may also need to fund child maintenance payments and sometimes spousal maintenance payments after a divorce, so damaging the business would be counter- productive.

2 Your business, along with your and your spouse’s other assets, will be considered a relevant asset within the divorce proceedings. You will need to provide information relating to the business, even if you are not the sole owner. If there are other business owners you should inform them of your divorce, if you have not already done so.

3 Your business is likely to be valued by an independent accountant, instructed jointly by you and your spouse, within the divorce. They will look at the value of your shares, how much money, if any, you can raise through the business to assist with the divorce settlement and the sustainable income that can be taken from the company going forward.

4 It is the net value of your shareholding that will be taken into account, after notional costs of sale and tax have been deducted. Whilst you may not be selling your shareholding, your shares will be valued on the basis that you are selling them.

5 Valuing a business is an art not a science, so different accountants have different approaches, which results in some accountants providing more optimistic valuations than others. It is therefore important to take advice on which accountants would be most suitable for your situation.

6 If your spouse also has shares in the company, it is unlikely that you will both remain shareholders in the company after your divorce. A few divorcing couples agree to continue running their business together and to both remain shareholders after they divorce. However, in the majority of divorces one spouse transfers their shares to the other as part of the divorce settlement.

7 The date of separation may be relevant if one spouse is to transfer their shares in the company to the other. If shares are transferred from one spouse to another in the tax year of separation, the Capital Gains Tax liability that arises on the transfer is paid by the spouse who receives the shares as and when they sell the shares in the future. If the shares are transferred from one spouse to another after the tax year of separation, the spouse who is transferring the shares will have to pay any Capital Gains Tax liability that arises on the transfer shortly after the transfer.

8 Do not be tempted to transfer your shares in the company to a third party, in an attempt to reduce your spouse’s claims on divorce. Any disposals of assets that are at an undervalue can be set aside by a divorce judge, and if the disposal took place within the 3 years prior to the divorce the onus is on the spouse who “got rid” of the asset to prove that it was not at an undervalue.

9 Just because you have a business does not mean that your divorce settlement will end up being argued about in court. Once you have an appropriate valuation report a financial agreement can then be negotiated, without the need for a judge’s input.

10 Make sure that you obtain legal advice from an expert family solicitor who regularly deals with divorce cases where there are businesses.

If you are concerned about any of the issued raised here, please get in touch today. We are here to help.

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