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How does divorce affect the family business?

A business, in which one or both of the parties on divorce has an interest, is a financial resource which the court considers when determining a fair financial outcome. This will be determined in accordance with what are called the s25 factors.

S25 Factors: What does the law say?

These are the range of factors set out in s25 of the Matrimonial Causes Act 1973. These factors include; the needs of the parties, the standard of living enjoyed during the marriage, income and earning capacity and contributions made during the marriage.

The court treats business interests as a resource of the parties under section 25(2)(a) of the Matrimonial Causes Act 1973.

The court has two essential functions in financial remedy cases involving businesses:

  1. To establish the value of the parties' interests in the business.
  2. To decide how that value should be reflected in the final financial distribution.

The decision about whether to value a business in proceedings for a financial remedy may not be straightforward and it is essential to obtain expert legal advice before proceeding with a valuation.

Step 1: Valuing a business

There are several different methods an expert may use to value a business. The expert will value the business taking in account various factors, for example, the assets that the business owns, the business earnings and profit and the way the business established and run.

In valuing a business, an expert may consider issues of liquidity and how money can be withdrawn from the business to fund a settlement, or the extent to which the business provides income to meet ongoing periodical payments (spousal maintenance).

Is divorce settlement money from a business taxable?

There are tax implications to extracting money from a business to fund a settlement and an expert should be asked to consider the most tax efficient methods of raising capital. If a substantial dividend is extracted to allow a party to pay a large lump sum and continue working in the business, both CGT and dividend tax may be payable.

What happens in regards to shares?

In exceptional circumstances, determining a fair financial outcome based on the current market value of shares may not be appropriate. For example, in B v B [2015] EWHC 210 (Fam) the husband was part of the senior management of a pharmaceutical company, in which he held shares and loan notes acquired during the marriage. The shares and loan notes were non-transferrable, and the court found that the wife should share in their future value as and when they were realised, by the husband paying her a lump sum or series of lump sums.

What happens if the business is not doing well?

The value of a business is not the same as the value of cash. In Wells v Wells [2002] EWCA Civ 476, the husband retained the majority of shares in the business, which was performing poorly and which the judge had found impossible to value. In addition, he was awarded £695,000 and the wife received around £1.35 million. The husband appealed and the Court of Appeal increased the husband's share of non-business assets.

Step 2: Achieving a fair financial outcome

To achieve a fair financial outcome, courts may:

  • Divide the assets in specieto provide each party with a proportionate share of the liquid and illiquid assets
  • Transfer shareholdings held by one party to the other.

This would particularly be the case where the parties to the divorce are both shareholders in the business and would be in accordance with the ‘clean break’ principle (that former spouses should settle their financial affairs in a way so that financial relations between them completely come to an end).

It would be rare for a court to order the transfer of shares to another party where only one party owns shares in the company as this would go against the clean break principle.  It could also cause disruption to the running of the business.

  • Apply a discount to illiquid assets received by a party.

The court also has the power to order a sale although a court will rarely do so because often, a business will be a source of wealth for the parties that, if sold, would bring an end to the income that it generates. Also, if a substantial part of the family wealth is the business, its liquidity might make it difficult to achieve a clean break.

If you would like any further information on how the court treats business assets on divorce, then  please do not hesitate to contact a member of our team for a confidential discussion about your personal circumstances.