It is important to protect your business if you and your spouse decide to part ways, writes ISABELLE DOUGLAS
Nobody starts a business, or gets married, expecting things to go pear-shaped. But in both scenarios, it’s wise to put protective measures in place early just in case things don’t end happily ever after. For business owners in Scotland, there can be significant legal implications if your marriage later breaks down.
Under the Family Law (Scotland) Act 1985, the net value of matrimonial property is to be shared fairly between spouses if they separate or divorce. “Fairly” typically means equally, unless special circumstances justify a different division.
Matrimonial property includes all assets acquired during the marriage and before the date of separation but generally excludes gifts or inheritances from third parties. This means that if you set up a business before marriage, your interest in that business is generally not considered matrimonial property. However, if the business is created during the marriage, it will fall within the scope of matrimonial property and be subject to division.
A common area of risk arises when the structure or ownership of a business changes during the marriage. For example, converting a sole trader operation into a limited company or transferring shares to a spouse – often for reasons of tax efficiency – can inadvertently turn a business interest which is not matrimonial property into matrimonial property.
The law does not provide a definitive test for when such a conversion occurs, and outcomes can vary depending on judicial interpretation. If a business interest is deemed matrimonial property, it may require sale, transfer or restructuring to satisfy a spouse’s claim.
Even where a business interest remains outside the matrimonial property definition, a spouse may still have grounds to make a financial claim. This is most commonly under Section 9(1)(b) of the 1985 Act, which allows for compensation where one party has gained an economic advantage through the other’s contributions. If a spouse has supported the business, financially or otherwise, and the business has grown in value as a result, they may be entitled to a capital sum, especially if profits have been retained within the business.
Operational challenges also arise when spouses are co-owners. Disagreements over control and decision-making can disrupt the day-to-day running of the business. Even after separation, both parties may remain entitled to share in profits, regardless of who continues to work in the business. Additionally, there can be tension between family law and company law valuations: family law assesses the value at the date of separation, while company law uses the current value, which can complicate financial settlements.
To mitigate these risks, business owners should seek legal advice early, ideally before entering into marriage.
A well-drafted Pre- or Post-Nuptial Agreement can provide clarity and protection, outlining how business assets will be treated in the event of separation.
These agreements are increasingly common and can be complemented by updates to company documents such as Partnership Agreements, Shareholders’ Agreements and Articles of Association.
Together, these measures offer greater certainty and financial security during what can be a challenging time.
Isabelle Douglas is a partner in family law at Aberdein Considine
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