Family Law explained: Handling business assets in divorce

During divorce, dividing assets is often one of the most complex aspects of the separation process – and this challenge can be made all the more complicated when one party has interest in a business.

Whether it’s a sole trader operation, a partnership or a shareholding in a limited company, the presence of a business adds additional layers of complexity that need careful attention.

In England and Wales, the law requires that all assets – including business interests – be considered when dividing property between spouses. And consequently, ensuring a fair division requires a nuanced understanding of both financial and legal matters.

Here, we give a breakdown of how the process typically works, and what key considerations need to be made when one party has a business or business interest.

How are business assets divided in divorce?

The starting point for dividing assets in a divorce is the principle of fairness, with the goal being to ensure that both parties are provided for financially – particularly if there are children involved. The court aims to achieve a just and equitable settlement; however, this doesn’t necessarily mean a 50/50 split.

Instead, it will consider various factors, including the needs and contributions of each spouse, the length of the marriage and the welfare of any children.

When a business is involved, this process inevitably becomes more complicated. Issues such as the value of the business, as well as the role of each spouse in its creation and continued operation, will all need to be carefully assessed.

What factors need to be considered?

The valuation of the business

One of the first steps in dividing business assets is to establish the value of the business. This can be a complex calculation, particularly if the business is privately held or does not have a straightforward market value.

Valuations are usually carried out by independent experts – such as forensic accountants – who will examine factors such as turnover, profit margins, market position and the value of any related physical assets.

If one spouse owns the business outright, this can be relatively straightforward – but if the business is a partnership or involves a significant number of shareholders, additional considerations may be required, e.g. the value of minority shares or partnership agreements.

Each party’s contributions to the business

In many cases, one spouse may have contributed more directly to the development and growth of the business, while the other spouse may have supported the family financially or taken care of domestic responsibilities.

It’s worth noting that both type of contributions are deemed important in this calculation and should be considered with regards the division of assets.

Crucially, however, English courts often take a broad view of what constitutes ‘contribution’; which can encompass different involvement levels:

• Direct contribution – this includes activities such as running the business, bringing in clients or making strategic decisions
• Indirect contribution – this could involve support through homemaking, raising children, or sacrificing career ambitions to allow the other spouse to focus on growing the business

Impact on future earnings

The court must consider how the business is structured and how this impacts future income potential for the spouse who owns it.

For example, if the business is still in its early stages and not yet profitable – or if the business generates irregular income – the court may need to consider spousal maintenance or other financial support options.

The court might also take into account whether the current owner plans to sell or liquidate the business and how that could affect their financial position moving forward.

Pension entitlements and shareholding

Should the business owner have a pension scheme tied to the company, for example a director’s pension or an occupational pension scheme, the value of this pension will also need to be factored into the asset division.

Similarly, if one spouse holds shares in the business, these shares will need to be valued and considered as part of the overall division.

Tax implications

The sale of a business or a transfer of assets may have tax implications, including Capital Gains Tax (CGT), and it’s essential to consider these potential costs when structuring a divorce settlement involving a business.

In some cases, the spouses may agree to defer or stagger the transfer of assets in order to mitigate their respective tax burdens.

What does a standard settlement look like?

Depending on the situation and assets in question, there are several ways a divorce settlement involving a business interest can be structured:

One spouse retains full ownership of the business
One spouse may decide to retain full ownership of the business, with the other spouse receiving a larger share of other assets to balance the settlement, for instance property, savings or pensions.

This option is often chosen if the business is central to the financial future of the family.

Selling the business
In some cases, it may be necessary to sell the business and divide the proceeds. This can be challenging for both parties – particularly if the business is deeply personal to one or both spouses or has significant long-term potential.

However, this route might be chosen if the business is difficult to separate or managing it jointly is an unfeasible option over the long term.

Establishing an ongoing business relationship
In situations where both parties have an interest in the business or are business partners, the couple may agree to continue working together post divorce.

However, this is relatively rare and can be difficult to navigate without clear boundaries and a shared vision for the business’s future.

Dividing business assets: what you need to know

Dividing assets in a divorce is a delicate and sometimes emotional process, and it becomes more complicated when a business or business interest is involved.

In order to ensure the fairest possible resolution, the court takes a comprehensive approach – factoring in the value of the business, each spouse’s contribution to its creation and success, and the financial needs of both parties.

It’s essential for both spouses to seek expert advice from Family Law experts, business valuers and accountants to ensure a fair and balanced settlement that works for both parties.

How we can help

Our friendly and experienced Family Law team understands the complexities of business ownership in divorce and have the expertise to help you navigate the legal, financial and emotional aspects of your unique case.

Get in touch with our dedicated professionals on 03333 058375, or by email via [email protected], for personalised guidance on securing a fair settlement.