My corporate law colleagues frequently advise clients how to restructure their businesses – not just to survive COVID-19 – but also to ring fence any assets they may feel belong outside of the family circle, writes Louise Barretto, Head of Family Law at solicitors Bishop & Sewell.
Family lawyers also spend a lot of time unpicking the ‘tax planning’ some spouses who work together sometimes learn unwittingly was not in their best interests when it comes to a divorce.
Ensuring that the tax liabilities of a couple working together in a business can be efficiently structured, occasionally overlooks the fact that if a business owner transfers any shares in the business they may have owned prior to the marriage, to their partner during a marriage, the court may treat those shares as being owned by the receiving spouse as their own asset and the business as part of the overall matrimonial asset pot to be divided up. Indeed, there is very little chance of avoiding enquiries into a business in cases where one party’s sole source of income is from that business which has supported the family.
Your partner may not even be directly employed or running the business to be entitled to a share the of it on your separation.
Sometimes a business will be treated as providing an income stream that supports both parties and there may be no intrinsic capital value to them beyond that. In other cases, there may be an underlying and additional capital value made up by, for example, a healthy net asset value.
The court has two roles in divorce and financial remedy proceedings involving businesses. The first is to establish the value of the business and then to decide how that value should be reflected in the financial distribution. So, should the business be sold and the proceeds divided, or should one party be entitled to retain the business and give up a larger share of a different asset. The issues of fairness and risk must be carefully considered by the court.
The decision about whether to value a business within financial proceedings (connected with divorce) is rarely straightforward. There are different methods of valuation. There may also be difficulties in agreeing on the identity of a single joint expert to provide a valuation report for the court. The court does not want to hear from different experts, (although these may be involved behind the scenes in the form of a “shadow” expert helping each party) and will usually insist on one single expert.
There will also often be issues about liquidity and the tax consequences of extracting cash where this is possible.
“No bias in favour of the money earner against the home maker and child carer”
Family lawyers, from the highly experienced to the newly qualified, will have recently been reminded that it is now twenty years since the landmark judgment in the case of White v White, concerning a separating couple who had previously worked together throughout their marriage.
Mr and Mrs White were dairy farmers in Somerset.
Farming divorces can be especially problematic because sometimes a farm has been passed down from generation to generation so establishing a just financial settlement once a married couple separate can be problematic.
Mrs White came from a farming background herself and for thirty years lived and worked on the farm with her husband where the couple brought up their three children.
The Court recognised that whilst each party to the marriage might have expected an equal division of assets Mr White inherited a second farm a year prior to their divorce, which was why the Court awarded him a slightly larger settlement, “Equality should be departed from only if, and to the extent that, there is good reason for doing so.”
In effect this farming story set the course for Family Law which we still follow. Lord Nicholls said: “There should be no bias in favour of the money-earner and against the home-maker and the child-carer”.
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About Bishop & Sewell LLP
Bishop & Sewell is a long-established, full service Central London law firm – with an international reach – specialising in Personal, Property and Commercial legal matters. To learn more, visit www.bishopandsewell.co.uk