Victor Collins

The family business comes in all shapes and sizes and in view of this can often be the most difficult financial settlement to conclude following a divorce.

In today’s uncertain economic climate there are potential storms on the horizon for the family business and in the event of a divorce, the business needs to be protected as quickly as possible for its survival and commercial viability for the future.

Why are there complications in these circumstances?

Dealing with the family business following divorce can raise many complex issues involving inheritance, financial contributions and other family members having a share or interest in the business.

How do the courts decide who gets what?

Historically, the family court and trial judge would seek to protect the family business from being heavily involved in a matrimonial settlement in order to avoid the business having to be sold. In view of the position, it was previously possible to try and ‘ring-fence’ the business. However, the position has changed following the case White v White 2001.

In the case, the court dealt with a 33-year marriage and assets totalling £4.6 million, the main being the family farming business. The case went to The Supreme Court, where Mrs White was awarded £1.69 million, 40% of the matrimonial assets, which resulted in the business having to be sold in order to provide Mrs White’s settlement.

Since the case, the law has leaned towards fairness and dividing the matrimonial assets and courts will only depart from equality where there is good reason to do so.

Understanding the business structure

The first step in resolving the family business is to understand the business structure, of which there are three main types:

1. The sole trader is the owner and controller of the business assets and personally liable for the business and its debts.

2. Partnerships can be formal or informal. There are various types of partnership. In view of the position the business structure can be more complicated. Partnership shares and ownership can vary as can business liability.

3.  A limited company can also be more complicated. This involves the issue of shares and appointment of directors within the company. There can be many owners of the business with restrictions being placed on the transfer of shares in the business.

Having established the family business structure, the next step is to value the business.

How is the family business valued?

The valuation of the family business is a crucial starting point since this determines what is in the ‘matrimonial pot’ for distribution between a divorcing couple.

The valuation of the business will almost always be based upon the current market valuation. Normally the valuation will be by a single joint expert who will be an independent qualified accountant.

In order to carry out the valuation the accountant will require full financial disclosure in relation to the business consisting of financial and management accounts. The accountant may also be instructed to deal with other issues such as: the liquidity of the business in order to raise funds and Capital Gains Tax payable on the transfer of shares, or disposal of the business.

When the family business involves land and buildings then it will be necessary to instruct an estate agent as a single joint expert to provide a valuation of these assets.

What could happen to the family business?

The final stage of the process is to decide how to deal with the family business as a settlement between a divorcing couple.  This will normally involve three options:

1. Putting the business up for sale: This option enables a divorcing couple to sell the business and divide the profits. However, selling the business may not always be practical or feasible for various reasons. It will also mean ‘selling the goose that lays the golden egg’.

2. Buying out the other spouse’s interest: This can involve a cash payment from the business to achieve this object. This can also involve a set-off, for example, one spouse taking ownership of the family business and the other spouse taking ownership of the former family home.

3. Co-owning the family business: For divorcing spouses who do not wish to sell the business then co-ownership of the business is another option. However, this is subject to the spouses being able to continue running the business together and being able to get on.”

Professional advice

It is important for divorcing spouses to ensure the correct professional experts are instructed to deal with the family business on divorce.

This not only involves specialised solicitors but also other professionals to deal with valuation and taxation implications in order to ensure the business is not at risk going forward and at the same time achieving a settlement which is fair and reasonable.

About Victor Collins

Victor qualified as a solicitor in 1983 and joined Nelsons in 2013.

He is a well-respected expert in financial settlements, regularly handling divorce cases with substantial assets with a particular emphasis on those involving a family business.

Victor has also developed a niche specialism advising on pre-nuptial, post-nuptial and separation agreements.

For more information on Nelsons Solicitors please visit www.nelsonslaw.co.uk or call 0115 958 6262.

The breakdown of a marriage in any family is an upsetting and emotional experience for those involved.

However, the ramifications and financial upheaval can be considerable and far reaching where a divorce affects a family farm.

There are few other occupations where home and work are so interrelated – the farm is not just a home and business, but a way of life. A farm can involve close family involvement and vested interests and can often be a capital rich, but income light, asset.

Why are there complications in these circumstances?

A farm may have been in the family for a number of generations, resulting in parents and siblings inheriting and sharing the agricultural business. This complex ownership means in the event of a divorce, resolving the family farm as a matrimonial asset can be a very difficult process involving special consideration.

How do the courts decide who gets what?

Where a couple divorces, all assets are taken into account regardless of where they came from. Since the case of White v White 2001, the law has leaned towards fairness when dividing the matrimonial assets and courts will only depart from equality where there is good reason to do so.

However, an equal division of assets and wealth accumulated during a marriage is not always achievable for farmers. This is because of the need to preserve assets that were inherited or owned long before the marriage.

White v White happened to be a case where the parties ran a farm in a farming partnership.

Prior to this case, financial cases tended to be settled based upon a ‘reasonable needs’ basis. This meant that in farming cases it was a lot easier to protect pre-matrimonial assets such as the farm from being sold to fund a divorce settlement.

However, White v White established the principle of fairness. The court ruled that the ‘yardstick of equality’ should be applied so the contribution of both parties to the marriage, and its length, should be taken into account.

This means the financially weaker party should not be disadvantaged and discriminated against when making a divorce settlement.

When a divorce takes place in these circumstances, it is first necessary to ascertain the make-up of the farming business. This includes legal ownership of the land, family trusts and tenancies.

The next stage is to value the farm. In this respect, a specialist valuer is required. It is essential to ensure all aspects of the farm are valued, including land, buildings, farm machinery, livestock and subsidies.

Finally, it is time to divide the farm and the other matrimonial assets.

 How is the farm and other matrimonial assets divided?

Barron J, in her judgement in the Y v Y 2012 case, gave seven factors as a useful guideline and checklist in farming cases relevant to the principle of sharing:

1. the nature of the assets (e.g. land/property, art, antiques, jewellery on the one hand, and cash or realisable securities on the other);
2. whether the inherited assets have been preserved in specie or converted in to different assets, realised or even spent;
3. how long they have been ‘in the family’;
4. the established or accepted intentions of both the previous holders of the assets and the spouse who has inherited them;
5. whether they have been ‘mingled’ (for example by being put into joint names of the spouses, or by being mixed with assets generated during the marriage);
6. the length of the marriage and therefore the period over which they have been ‘enjoyed’ by the other spouse;
7. whether the other spouse has directly contributed to the improvement or preservation of the inherited wealth.

Protecting your assets

A common mistake and misconception made by farmers and land owners is that a farming asset or business is ‘ring-fenced’ and therefore excluded from any divorce settlement. This is not the case.

The principle of equality established in White v White means that all assets, including the farm, must be taken into account when determining a divorce settlement based upon the requirement of fairness.

However, a trial judge does have the discretion to depart from this basic principle if it becomes clear an equal division of assets is not fair.

This is particularly the case if such a division is likely to damage the farm and business irrevocably.

For these reasons, farming cases can present a number of complex and unique challenges which require an experienced family solicitor specialising in farming cases for their resolution.

For more information on Nelsons Solicitors please visit www.nelsonslaw.co.uk or call 0115 958 6262.

About Victor Collins

Victor qualified as a solicitor in 1983 and joined Nelsons in 2013.

He is a well-respected expert in financial settlements, regularly handling divorce cases with substantial assets with a particular emphasis on those involving a family business.

Victor has also developed a niche specialism advising on pre-nuptial, post-nuptial and separation agreements.