Whatever people say about not mixing business and relationships, it’s usually better to view them in the round.
Alison McKee, Partner and Head of our Family Law team explains that being aware of some fundamental family law principles and taking advice early could save you from sleepwalking into this situation.
If you have a business or farm, you will no doubt want to run it tax-efficiently. Sometimes, though, a financial or commercial decision that seems sensible at the time can have unintended and expensive consequences if you later split with your spouse or civil partner.
What’s in the pot?
When a couple divorce, the financial arrangements usually involve them sharing the matrimonial assets between them. The big question for the couple and their lawyers is what does and doesn’t count as a matrimonial asset.
The starting point is that:
- Assets purchased during the marriage, in sole or joint names, go into the matrimonial pot to be divided.
- Assets already owned by one spouse at the time of marriage, inherited assets, and assets gifted from a third party are non-matrimonial assets and do not have to be shared.
That’s the simple part. It then becomes more complicated because non-matrimonial assets can convert into matrimonial assets, without one or both spouses realising. For example, if you inherit money from your granny and keep it in your savings, it is excluded from the pot; if you use it to buy a holiday house, that house could be a matrimonial asset.
Business red flags
If you have your own business or farm, the possibilities for it converting from a non-matrimonial asset into a matrimonial one are especially tricky to navigate. A step you make for tax or commercial reasons – such as changing the structure of the business – could subsequently embroil you in a complex family law dispute about whether the asset now belongs in the matrimonial pot.
We give some examples in the box on this page, but beware it’s not a comprehensive list. You will also see that mingling family and business can create employment law pitfalls.
Three scenarios when business and family can mix badly
- You inherit or set up the business before your marriage but afterwards, for tax or commercial purposes, you change its corporate structure or reissue shares in a different class. This could open the way for your spouse to argue that a new matrimonial asset has been created.
- After marrying, you make your spouse a partner, shareholder or director in your business or farm, perhaps for tax reasons. Even if their role is not active, it could be argued that the arrangement has converted the asset into a matrimonial one.
- You make your spouse an employee of the business. Even if their role is just on paper, they may be eligible for employment rights, such as the right to claim for unfair dismissal if you later decide you want them off the books.
Take precautions
None of this means your hands are tied in terms of running your business or farm tax-efficiently; nor does it mean that every claim about a business being a matrimonial asset will succeed.
What it does mean is that when making decisions around a business, it’s worthwhile getting family law advice alongside your tax or commercial advice to understand the possible consequences.
A family law solicitor can also tell you how to protect yourself from situations like those above, for example with a prenuptial or postnuptial agreement. It’s likely to be far cheaper and less damaging to both the family and the business than a fight over the assets.
