ISABELLE DOUGLAS explains the legal considerations to keep in mind when business interests are affected by a relationship breakdown
The breakdown of a marriage or civil partnership can be a difficult and painful process for those involved and it becomes further complicated if the couple are also involved in running a business together. Deciding who gets what means resolving things like ownership rights and working out if there are outstanding claims.
The net value of the matrimonial or partnership property should be shared fairly between the parties. “Fairly” generally means equally unless special circumstances justify unequal sharing.
Matrimonial or partnership property includes all property belonging to the parties, jointly or individually, on the date they ceased to cohabit, provided it was acquired during the marriage or civil partnership (excluding gifts or inheritance).
If you started a business as a sole trader, private company, or in partnership before your marriage or civil partnership, your interest in the business would not be considered matrimonial or partnership property and thus not subject to fair sharing. However, a financial claim might still be possible if either of you have gained an economic advantage or suffered an economic disadvantage in relation to the business.
Conversely, if you started a business during your marriage or civil partnership, your business interest is regarded as matrimonial or partnership property unless it was a gift or inheritance.
A common pitfall for business owners and their advisers (lawyers, accountants, and financial advisers) is when the business structure changes (e.g., a sole trader becomes a limited company) or when one spouse or civil partner acquires an interest in the other’s business during the marriage or civil partnership.
Tax considerations often drive these decisions, but from a family law perspective, such changes may be seen as conversion, turning non-matrimonial or partnership property into matrimonial or partnership property.
This could subject the business interest to fair sharing, potentially resulting in the sale, transfer, or restructuring of the business to meet the spouse’s or civil partner’s claim. Without proper consideration of the legal implications before altering the business structure, unintended consequences may arise if the relationship breaks down. The legal position is not always clear and may require litigation.
The situation is also complex for cohabitees. If a couple cohabits instead of marrying or entering a civil partnership, each party generally retains their own assets and debts upon separation, including business interests.
Thus, if one cohabitee acquires an interest in the other’s business, they retain that interest on separation. Family law does not currently provide a mechanism for one cohabitee to seek the transfer of the other’s business interest, except by agreement. Even with mutual agreement, the transferor is entitled to the value of the interest in exchange, which may not have been intended when the interest was acquired.
The good news is that by seeking comprehensive family law advice before making business decisions, you can avoid unwanted consequences if your relationship ends.
A Pre- or Post-Nuptial Agreement or Cohabitation Agreement, often alongside alterations to an existing Partnership Agreement, Shareholders’ Agreement, or other company documents, can regulate how the business interest will be treated on separation, divorce, or dissolution, providing clarity and certainty during a difficult time.
Isabelle Douglas is a partner at Aberdein Considine
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