All too often we come across clients who have restructured their business on the basis of tax advice without consideration or warning of the consequences this will have in relation to family law. We would strongly recommend that clients take advice and are fully aware of the consequences restructuring will have from a family law perspective.
The situation often arises - a client has separated from their spouse and they want to sort out the finances. The client runs a successful business which they built up with their blood, sweat and tears prior to the marriage. The client received tax advice a few years ago during the marriage to either (1) incorporate their sole trader business or partnership into a limited company or (2) transfer shares in their limited company to their spouse. The client is at pains to emphasise that this was done purely for tax purposes and their spouse is not involved (or even interested!) in the day to day running of the business. The client owned the business before they even met their spouse - surely their spouse is not entitled to half of their business which they have worked so hard for?!
In this blog, I want to discuss and explain what impact incorporating your business or transferring shares to your spouse during the marriage has and what all business owners should be aware of when making decisions around restructuring their business if they are married.
On divorce, the starting position in Scot's law is that matrimonial property is shared fairly between spouses on divorce. The assumption is that fair sharing is equal sharing. Matrimonial property is property acquired by either spouse during the period of marriage, other than by way of gift or inheritance.
If you own a business prior to the marriage or if a business, is gifted to you or inherited by you during the marriage, as long as you continue to own that business in the same form throughout the marriage, it will not be considered "matrimonial property" and it will be effectively be ring-fenced from the pot to be shared with your spouse on divorce. Put simply, if you own a business prior to marriage, that business will not be considered as matrimonial property and your spouse will not be entitled to share in its value.
By incorporating your business during the marriage, you (and possibly your spouse if they are to receive shares too) are acquiring new shares and those shares acquired will be considered as matrimonial property and will enter the pot to be shared on divorce.
By transferring shares in your business to your spouse during marriage, your spouse is acquiring shares during the marriage and those shares will be considered as matrimonial property. Those shares will enter the pot for sharing on divorce.
By simply changing the way you hold your business interests - i.e. incorporating your sole trader business during the marriage, you have converted your previously ring-fenced business into matrimonial property.
Once shares in a business are considered as matrimonial property they are in the pot for sharing. The spouse who set up the business then faces the challenging and often expensive battle of trying to justify a departure from the presumption of equal sharing in relation to the value of the shares.
So what advice would the Morton Fraser Family Law team give a client thinking of re-structuring their business? From our experience, clients regret not having been aware of the impacts of re-structuring their business from a family law perspective. Many clients are not aware that re-structuring can converted a ring-fenced business into matrimonial property. There are lots of ways that the Morton Fraser Family Law team can advise you to ensure that you make an informed decision before re-structuring your business and we can assist you putting in place the measures to ensure your business is protected.