How is a family business treated on divorce?

Many successful businesses develop into family businesses as they grow. Spouses may be involved in the business at the start or become involved as the business develops. Children may also become involved. Often advice about reducing income tax or inheritance tax can lead to the transfer of shares to family members. Whilst this may have the desired impact upon tax, what does this mean for the business if any of the shareholders divorce?

If someone owns shares in a company, these will be considered a matrimonial asset if they divorce. A value is likely to be attributed to those shares within divorce proceedings. The more valuable the shareholding the more important the shares will be within the divorce. A Judge can order that an expert accountant value the company and the divorcing person’s shareholding. If they have a minority shareholding, the value of their shares is likely to be discounted, as there will be a limited number of buyers for a minority shareholding in a private limited company.

The accountant may also be asked to look at the issue of liquidity, which is how much money a company can raise to assist with a divorce settlement. If the shareholder is a minority shareholder, they are unlikely to be able to force the company to allow a dividend to be declared to enable them to pay money to their former spouse. However, if a company is said to have liquidity and the divorcing shareholder does not have other money to fund their divorce settlement from, a judge could put them under pressure to raise money through the company. If the shareholder is a majority shareholder, they may be able to force the declaration of a dividend.

A judge has the power to transfer shares from the shareholder to their spouse as part of the divorce settlement. A judge is unlikely to do this as having a former spouse as a shareholder in a family company is highly likely to be an unworkable scenario. Where both spouses are shareholders, the judge is likely to transfer the shares of one spouse to the other, if one of them has a more important role in the company or one of them does not want to stay in the company due to the divorce. In some divorces both spouses remain shareholders in the company, as they are both intrinsic to its success, but this is not a workable scenario for many divorcing couples.

If the shares were gifted to a family member that is divorcing, they may be able to argue that the shares should not be treated as matrimonial assets. However, judges will only treat inherited and gifted assets differently if there are more than enough matrimonial assets to meet the divorcing couple’s needs. If there are, the value of the shares may be discounted or even ringfenced completely within the divorce proceedings.

However, it should be noted that when the shares were gifted is a relevant factor. If they were gifted many years before the couple divorce and if the value of the company has increased since then and during the couple’s marriage, the court is more likely to consider the shares a matrimonial asset. If the shares were gifted shortly before separation, a judge is more likely to treat them differently, provided the couple’s needs can be met.