How to safeguard your business interests on divorce

Grant Hassan | 13 Jul 2016

INSIGHTS

In recent years we have witnessed a number of high profile divorces in the press, including that of Scottish businessman Duncan Bannatyne who has since disclosed that he regrets having not entered a pre-nuptial agreement (the lack of which is estimated to have cost him in the region of £345 million!)

The law in Scotland outlining how finances should be resolved on divorce is fairly well established. The Family Law (Scotland) Act 1985 provides that the ‘net value of matrimonial property’ should be shared fairly. It shall be deemed to be shared fairly when shared equally or in such other proportions as are justified by special circumstances.

What is matrimonial property?

Matrimonial property includes all property belonging to the parties or either of them (in sole or joint names) at the relevant date. The relevant date is usually the date of separation, or the date a divorce action has been served. There are exceptions such as gifts from a third party, inheritances and usually property acquired before marriage unless it was intended to be used as a family home or used as household furniture. Examples of matrimonial property include; a family home, land or crofts, business interests, pensions, investments, savings, vehicles, loans and credit card debts. A point to note is that pensions can be of significant value and should not be overlooked.

To calculate the ‘net’ value of matrimonial property, the first step is to determine the total value of all matrimonial assets and debts at the relevant date. Once the values are known, the total debt value is subtracted from the total asset value. The remaining balance is known as the ‘net’ value of matrimonial property.

How do business interests fall within matrimonial property?

If a business was acquired prior to marriage and the ownership or structure has not changed, it would not usually be regarded as matrimonial property. If a business interest was acquired during the period of marriage and prior to the relevant date, it would on the face of it, be regarded as matrimonial property.

To obtain a value of a business an accountant would usually be instructed to determine the appropriate method of valuation and then calculate the value at the relevant date. A valuation can be determined using a number of methods, such as basing the value on business earnings, the net asset value of the business or on what a willing buyer is prepared to pay.

Businesses exist in various forms. Over time a business structure may change from one entity to another, usually for tax or personal liability purposes. Often spouses may enter partnership together or change the allotment of shares within a company to derive greater income and pay less tax. In the first instance these options would appear advantageous; however for divorce purposes, a change to the structure of a business during the period of marriage can convert a business that may have been non-matrimonial property into matrimonial property. Therefore business owners should be aware that the value would then fall within the overall net value of matrimonial property for division upon divorce.

Protecting business interests

The most effective method of is to obtain legal advice from a family and corporate lawyer prior to making any decisions on restructuring. A business owner should obtain legal advice if they are considering; marriage, starting a new business, changing an existing business structure, entering a partnership or changing the allotment of shares within a company.

Should an owner wish to safeguard a business interest from divorce, a useful option is to enter a pre-nuptial agreement prior to marriage or a post-nuptial agreement during marriage. Such agreements are legally enforceable and can ring fence a business or other assets from falling within the scope of matrimonial property.

If a business is regarded as matrimonial property this does not necessarily mean that a divorce will have a detrimental effect on the business interest. Any business interests will be valued and fall within the overall pot of matrimonial property for fair division. A fair division can be achieved without effecting business interests with careful consideration. Obtaining legal advice at the right time can be essential in ensuring that business interests remain protected.