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Divorce myth: Businesses need to be sold on divorce

17 Mar 2022

It is not uncommon for one or both parties to a divorce to have an interest in a business. This may be a family business run between spouses perhaps with involvement from the wider family, or it may be that one spouse has an interest in the company for which they work. In a divorce situation, it’s a misconception, or myth, that a business needs to be sold on divorce. It’s correct that any value in the business will need to be considered as part of the financial settlement. This does not, however, always require a sale of the business.

Different types of businesses will be considered in different ways

Limited companies with both as shareholders

Let’s say that the wife runs a consultancy business from home. She earns a good income, it is set up as a limited company so she can take a large part of her income as dividends at a lower tax rate. The husband is also a shareholder of the business, so they can divide the dividend income and minimise their tax exposure. There would be no need for this business to be dissolved or sold on divorce, as the husband can simply transfer his shares back to the wife as part of the settlement.

Property management businesses

If it’s a property management business, then the company might own a portfolio of properties. The value of those properties – and therefore the business – does need to be taken into account in the financial settlement. It may be that some of the properties are transferred to a new company in one party’s name, and the original company is retained by the other. Specialist tax advice would need to be taken in this scenario.

Jointly run businesses

It does however become a little more complicated when there is a trading business jointly run by a husband and wife. They have equally been involved in the setting up of the company and in its day to day running, and they both take an income from the company. Depending upon the circumstances of their relationship breakdown, they may wish to continue running the business, moving forward as business partners, rather than spouses.

In other situations, this may be a recipe for disaster. In this situation, the business can either be sold, and the proceeds divided fairly, or it can be retained by one of the spouses, and the other compensated for their share. It’s necessary to obtain specialist accountancy advice on the value of the company if there is to be a buyout by one spouse, to ensure the other is fairly compensated. The valuation would not only take into account the turnover of the business and any assets, but also the goodwill accrued during its period of operation.

If the business has been started by another family member, perhaps prior to the marriage, then a valuation can look at excluding any value built up in the company prior to a certain date and an argument made that such prior value would be a non-matrimonial asset.

However, let’s say that the business is valued and it is worth around one half of the value of the family home. One approach may be to allocate the house to one spouse in the financial settlement, and the other will retain the business, with the payment of a lump sum to balance any inequality. However, one consideration in this scenario is whether it is fair to give one party a ‘safe’ capital asset, such as the equity in a property, and give the other a more ‘risky’ asset, being the business. Equally, the spouse retaining the house may consider it unfair that their capital is tied up in their home, whereas the one retaining the business has capital and an income stream.

Every situation is unique

There are so many considerations and competing factors when dealing with businesses on divorce. Each party and couple will have a different approach, depending upon their own circumstances and those of the business itself. An agreement in relation to the finances on divorce is bespoke to each couple – there is no one-size-fits-all approach and there is certainly not a presumption that businesses need to be sold on divorce.

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Written by

Helen Fisher

Managing Associate