How to protect your business in divorce proceedings

Divorce law in England and Wales has evolved significantly with the introduction of no-fault divorce in April 2022, marking a transformative change that encourages a more straightforward, less blame-driven process. However, whilst the divorce process itself has been simplified, the complexities surrounding business assets remain as challenging as ever.

Are business assets automatically included in divorce settlements?

In most cases, businesses and their value may be included within the assets to be shared within the divorce settlement, even if one spouse has never been involved in the business. In England and Wales, courts take a broad approach to determining what constitutes matrimonial property, though the treatment of business assets depends on various factors, including when they were established or how they developed during the marriage.

This broad approach means that various forms of business interests can be subject to division, i.e. company shares, intellectual property rights, business premises, goodwill and future earning potential, company pensions, e.g. a Self-Invested Personal Pension Plan (SIPP), and professional practices.

Business interests will generally only be taken into account as matrimonial property if they were set up or acquired during the marriage or civil partnership. Pre-existing business interests may also be considered, particularly where there has been an increase in value during the marriage, or where they have become intermingled with matrimonial assets.

Any increase in the value of pre-existing business interests while you were married or civil partners might be counted as matrimonial property.

The concepts of ‘matrimonial’ and ‘non-matrimonial’ property have developed in recent years but overall, a court needs to consider all of the circumstances of a case to include the welfare of any minor children, the length of the relationship, the parties’ ages, any relevant health issues, contributions, the standard of living and so on.

One very relevant factor will be the parties’ respective needs for housing and income, and where the case involves ‘needs’, any argument about ringfencing ‘non matrimonial property’ may carry little or no weight.

What recent legal changes affect business assets in divorce?

Recent amendments to the Family Procedure Rules (FPR), which came into effect on 29th April 2024, represent a significant shift towards non-court dispute resolution (NCDR). The updated FPR now encompasses an expanded scope of alternative dispute resolution methods. Whilst mediation has traditionally been the primary focus, the new framework incorporates collaborative approaches, arbitration processes, and private financial resolution mechanisms.

For business owners, this shift towards NCDR can be particularly beneficial, as it allows for more flexible and commercial solutions that traditional court proceedings might not provide. That said, for the non-business owner, they may require greater scrutiny in terms of establishing the value of the company shares.

Moreover, important changes in Capital Gains Tax (CGT) came into force from April 2023 regarding separation and divorce. These should be considered very carefully, as there will be benefits for some people in delaying the finalisation of financial arrangements or the making of court orders until April 2023 onwards. The reforms enable separated couples to benefit from no gain/no loss transfers for up to three years following the tax year in which they ceased cohabiting. It is always important to seek separate accountancy advice about the tax implications of any proposed financial settlement,

How are businesses valued during divorce proceedings?

Business valuations centre on the value of the party’s interest in the company or partnership.

However, there is no one formula for valuing a business, and the approach that the expert is asked to take, including the variables that may need to be applied, requires careful consideration and will differ from one case to another.

Depending on the type of business, the expert might be asked to look at, for example, the net asset value and/or the profits. This may lead to issues in terms of a fair discount to be applied to a minority interest in a business or whether, in fact, the business is a ‘quasi partnership’ and no discount should be applied.

You and your ex-partner might agree to use what’s called a single joint expert to value the business. This person is independent and there to provide an impartial valuation. This approach is often preferred by courts as it reduces costs and provides a single, authoritative opinion. There would be one letter of instruction to scope out what the agreed expert is to report on and at joint cost.

At Maguire Family Law, we understand that business valuations can become contentious, particularly when one spouse suspects the other of deliberately undervaluing their interests. It is not uncommon for a business valuation to be disputed during a divorce; for instance, the spouse not involved in the business may be sceptical about a low business valuation if the couple previously enjoyed a high standard of living. Depending on the case, it can be a tactically good idea to have a ‘shadow’ accountancy expert who can help with challenging any agreed expert’s report, help with framing questions and how best to proceed. Not only that, there are also factors such as liquidity and business risk generally.

So, there can be an accountancy exercise to look at what the shares in the business are worth but there are also linked legal arguments in terms of liquidity and/or risk. Put simply, the court may take into account that £1 in cash is not the same as £1 in a business, so it might be prepared to discount the value further.

Can prenuptial agreements protect my business?

Prenuptial agreements represent one of the most effective methods of protecting business assets. A 2023 YouGov survey found that 42 percent of British people viewed them as a “good idea”, reflecting changing attitudes towards these protective instruments.

Whilst prenuptial agreements lack automatic enforceability in English and Welsh courts, judicial attitudes have shifted significantly. Courts increasingly recognise these agreements as evidence of couples’ matrimonial intentions. The landmark case of Radmacher v Granatino established that courts should give effect to prenuptial agreements that meet certain criteria.

Essential requirements for prenups include:

• You and your partner entered into the agreement of your own free will, without any undue influence.
• The agreement was signed at least 28 days before the wedding.
• Both parties must have received a full and frank disclosure about the other party’s financial situation at the time of making the agreement.
• Independent legal advice was obtained by both parties.

Prenuptial agreements enable couples to safeguard specific assets from potential matrimonial division. These protected assets need not possess substantial monetary worth.

It is also important that the terms of the prenup are fair and certainly if the level of financial provisions proposed to the financially weaker party is mean, then a court is likely to have little regard to the prenup. Equally, it is important that the financial disclosure is as full as it can be so as to give as much weight as possible to the prenuptial agreement. A material nondisclosure of wealth or assets is likely to mean the prenup will be ignored.

There can also be further changes which may undermine a prenup, for example, the birth of a child or ill health. These issues can be considered when preparing a prenup and the level of financial provision to be built in, or the parties may agree to a review clause.

Certainly, a prenup is a useful legal document to protect a business interest. Whilst not binding on any future court, it may well be very persuasive in terms of the outcome in the event of a dispute. This is also relevant where parents might want to gift company shares to their adult children and wish to have some layer of protection in the event of a future separation of divorce.

What if I’m already married? Are there still options?

For those already married, postnuptial agreements offer similar protection. A postnup is similar to a prenuptial agreement but is signed after marriage.

Although postnuptial agreements lack legal enforceability, judicial authorities typically honour them when they demonstrate fairness and proper legal guidance was obtained. In short, the same principles apply as with prenuptial agreements.

Does my business structure affect protection?

Limited companies face potential inclusion in divorce settlements as they constitute matrimonial assets. Courts have the power to order a sale of a business or transfer shares from one party to the other but this rarely happens. Overall, the court is looking to achieve (where possible) a financial clean break between the parties. This can include offsetting the value of the shares against other assets in the case.

Parties also need to be aware of potentially double-counting e.g. (a) the value of the shares but (b) seeking spousal maintenance from the dividend income. This is not always the case, and each situation is different from the next.

However, proper structuring can still provide some protection. When businesses operate as incorporated entities, their separate legal status may offer some asset protection benefits during matrimonial proceedings. There may be the rights and interests of other shareholders to take into account and who are obviously not parties to the case, nor can the court make orders against them unless they or the business is joined into the proceedings.

However, this does not derogate from the point that the shares of one spouse will need to be disclosed and taken into account as part of the division of the assets.

What are my options for resolving business asset disputes?

Family mediation provides a neutral environment where couples can openly discuss their assets and work towards mutually acceptable solutions. Mediators facilitate productive conversations, help clarify financial information and guide couples through the asset valuation process.

For business owners, mediation offers opportunities to craft creative solutions such as deferred payment arrangements tied to business performance, ongoing profit-sharing agreements, or structured buy-outs over time.

If only one spouse is involved in the business, the courts will generally try to maintain the existing status, rather than order the company owner to give up or share their business interests. The court’s options include offsetting against other matrimonial assets, ordering deferred lump sum payments, or transferring shares between parties.

Family mediation is one option, and in our experience, most cases are agreed at a certain point, and this can be through sensible solicitor/party negotiation. The overall objective is that the financial settlement is fair.

These options and others depend very much on good communication, engagement, cooperation and honesty. However, a party should never be frightened of considering the court as a viable option.

Cases can become stuck where one party believes the business to be worth £x and the other £y, and a lot of time and costs can be wasted going round in circles. There are other situations where the business assets are complex or there is missing information. This can cry out for court intervention and some scrutiny, to help pave the way to a fair resolution.

What should I avoid during divorce proceedings?

Inadequate financial disclosure during matrimonial proceedings represents a significant error that can result in severe legal and financial repercussions. In Brown vs Brown [2024], Mr Brown failed to provide key financial documentation, including his Form E and the Cash Equivalent Transfer Value (CETV) of his pension. His persistent non-compliance led to a contempt finding and a 19-day custodial sentence.

Equally important is avoiding attempts to hide or transfer business assets improperly. Courts impose severe penalties on attempts to hide, transfer, or improperly dispose of. The proceeds will also be deemed a marital asset, which means that your spouse may be entitled to some of the profit or alternative compensation.

Ultimately, a material non-financial disclosure can result in your settlement being set aside, the court penalising the offending party by way of costs and/or taking into account their conduct and awarding the other party a greater financial settlement than they would otherwise be entitled to.

How can we help you?

If you’re facing divorce proceedings and need expert guidance on protecting your business assets, our specialist team can provide tailored advice for your unique circumstances. We have substantial experience in dealing with business assets, how these assets are valued, the risk or tax issues to take into account, the challenges to be made and on occasions, how to trace monies that might have been dissipated from the business.

We can advise you on how best to protect your business and secure your future, to consider the tactical considerations and options. At the same time, we have great experience in acting for the non-business owning party and how to pierce that corporate veil and consider your future financial provision.

Learn more about our business divorce services and how we can help safeguard your business interests whilst ensuring a fair resolution for all parties.