Who will keep the business?
This is usually the first question I am asked. Often one spouse plays more of a key role in the business that the other; in that scenario, it is usually agreed that the spouse with the key role will retain the business, with the other’s shares being transferred to them. The spouse leaving the business will have to be compensated in the divorce settlement for their loss of interest in the business.
But if there is a dispute, a judge can decide who should keep the business, as the judge havsthe power to transfers shares from one spouse to another. A judge also has the power to order a sale of company, if the husband and wife are the only shareholders, although this would be unusual if one spouse wants to keep the business and the other spouse can still receive a fair financial settlement if the business is not sold.
In some divorces the couple both keep their respective shareholdings, and remain in business together. This often happens when a sale of the company is envisaged in the next few years and of course this requires the couple to continue to work together for the benefit of the business. A detailed shareholders' agreement would usually be needed in these circumstances, in order to allow the business to continue trading smoothly.
How will the business be treated within the divorce?
The business is a matrimonial asset, and will usually be valued within the divorce proceedings, if the couple cannot agree its value. The value of each spouse’s shareholding will also need to be valued. If they have a small number of shares, a minority discount may be applied to the value of those shares.
If one spouse is keeping the business, its value will be put on their side of the balance sheet. If the business is valuable, and there are few other matrimonial assets, the spouse retaining the business may need to raise money to pay a capital sum to their spouse, so that there is a fair divorce settlement. In light of this one of the issues that will need to be looked at by an accountant is how much money can be raised through the business (as well as valuing the business and shareholdings). This is known as liquidity.
If a sufficiently large sum cannot be raised through the business, or from other matrimonial assets, to pay to the spouse who is leaving the business, the sum may have to be paid over a period of a few years. In this scenario the spouse leaving the business may also receive interest on the sums due until they are paid.
What will the spouse leaving the business do for income?
If one spouse retains the business, they will receive all the salary and dividends that they and their spouse received when they were both still in the business: their income is therefore likely to increase. However, the spouse who leaves the business will lose their income and therefore have to look for income from elsewhere. That spouse has an obligation to maximise their earning capacity, by obtaining alternative employment if they can. The will also need to use any capital that they have, on top of their house, to provide an investment income. However, this may still not provide them with sufficient income to meet their income needs. In this scenario the spouse who retains the business may have to pay their ex maintenance.
Tax issues to consider relating to a business on divorce
If one spouse transfers their shares in a company to their other spouse, this is a disposal for Capital Gains Tax purposes, and the tax payable will need to be factored into the settlement. An accountant will be able to advise on the amount of tax payable and what reliefs may be available, such as Entrepreneurs' Relief, in order to reduce the tax liability.
It may also be more tax efficient for the company, rather than the spouse who is retaining the business, to buy back the shares, but again, this is something an accountant can advise upon.
Before a couple agree how their business should be dealt with within their divorce proceedings, it is vital expert advice is obtained on all the tax issues that will arise.
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