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How to handle business assets during a divorce

By Nicola Harries, partner, Stevens & Bolton LLP

There are obvious financial benefits to involving your spouse in your company when all is going well. It is common for spouses to hold shares, be a director or company secretary or be paid a salary, so that funds can be withdrawn from the business as tax efficiently as possible for the benefit of the whole family. But, unfortunately, when a marriage fails that drive for tax efficiency can return to haunt the owner personally, as well as the company. So, how can you best manage the tricky process of splitting assets during a divorce? 

Be careful of transferring shares

Family courts will distinguish between assets built up during a marriage, and those brought to a marriage by one party. The value of assets built up during a marriage will often be shared equally between spouses, particularly after a long marriage. If you owned your interest in the company before meeting or marrying your spouse, be very cautious about transferring shares to them. Doing so may substantially reduce your chances of successfully arguing that the value of the company referable to your combined shareholding is a ‘non-matrimonial’ asset.  

Maximise share protection

If you do transfer shares to your spouse, review the articles of association first, and, if necessary, amend them to provide maximum protection. Check whether the articles include pre-emption provisions. Commonly, these would require a shareholder (including a spouse) to offer their shares to existing shareholders first, rather than third parties.  

Review permitted transfer provisions

Articles of association often contain permitted transfer provisions to enable a shareholder to transfer some or all of their shares to their spouse (and often other close relations). Before making use of permitted transfers, ensure that the husband or wife to whom the spouse plans to transfer shares will be required to transfer them back if the marriage is dissolved. 

If your spouse’s shareholding is affected by such provisions, they will have less leverage in negotiations when the articles will automatically strip them of their shareholding at the end of a divorce. Both permitted transfer and pre-emption provisions could negatively affect the value of a spouse’s shareholding during a marriage breakdown, giving greater leverage to the SME-running spouse in negotiations.

Cover off employment claims

 If your spouse receives a salary from the company, they will have potential claims against it in the event that their employment is terminated as a result of a divorce. Not employing your spouse will avoid this issue, but if it is too late for that cover off all potential employment claims within any divorce settlement to ensure that your spouse does not seek a “second bite of the cherry” by making subsequent claims to the employment tribunal. 

Watch out for HMRC

Remember that after a divorce, the court will not approve a situation where an ex-spouse remains “on the books” as a cost-effective means of paying ongoing spousal maintenance. Without any genuine contribution by the ex-spouse to the company, the court considers such arrangements to be tantamount to tax evasion, and HMRC may choose to investigate you or the company as a whole, and family judges have been known to report to HMRC in certain situations. 

Further, continuing with your ex-spouse as an employee means that their potential employment claims will remain open for the duration. Consider too the complications that may be caused when trying to sell a company employing an ex-spouse. 
 

Review expenses claims

Many SME owners justifiably put expenses through the company. Family lawyers regularly hear claims that a family’s lifestyle is funded through expenses put through the business, and that the profits declared, and the income actually drawn, are not reflective of the level of income that the company could create and maintain. The investigation of such claims is time-consuming and expensive, requiring a thorough analysis of the company’s finances by external forensic accountants.  

Protect sensitive information

Lastly, whether your spouse has had a genuine role in the company or not, they are likely to be aware of information (potentially commercially sensitive) picked up during the course of the marriage. Ensure that the divorce settlement contains appropriate undertakings to prevent the dissemination of that information once the divorce has concluded.