Over 40,000 new businesses were set up in Scotland in 2023 but what are the family law considerations for spouses, civil partners and cohabitees where business interests are concerned?
In Scotland, when a married couple or civil partners separate or divorce, or dissolve a civil partnership, the net value of the matrimonial or partnership property should be shared fairly between the parties. Fairly means equally unless unequal sharing is justified by special circumstances. The matrimonial or partnership property is all the property belonging to the parties, either jointly or as individuals, on the date the parties ceased to cohabit, if it was acquired (other than by way of gift or succession) during the marriage or civil partnership.
Therefore, if you set up in business as a sole trader, as a private company or in partnership prior to your marriage or civil partnership, your interest in the business would not be regarded as matrimonial or partnership property and would not be subject to fair sharing. If you are in business or partnership with your spouse or civil partner, the same would apply to their interest. However, it may still be possible to make a financial claim on the value of a business interest belonging to your spouse or civil partner if your spouse or civil partner has gained an economic advantage from your contributions and/or you have suffered an economic disadvantage in the interests of your spouse or civil partner in relation to the business.
It follows that if you set up in business during your marriage or civil partnership, your business interest shall be regarded as matrimonial or partnership property, unless the business interest was gifted to you or inherited by you.
A common pitfall and where business owners and their professional advisors (including lawyers, accountants and financial advisors) must exercise caution, is where the structure of the business changes (for example, a sole trader becomes a limited company) or where one of the spouses or civil partners acquire an interest in the other spouse or civil partner’s business during the marriage or civil partnership. We, as family lawyers, understand that tax considerations are often the motivation behind these business decisions. However, for the purposes of family law, this may be regarded as conversion and may result in non-matrimonial or partnership property becoming matrimonial or partnership property. This means that the value of the business interest would be subject to the requirement for fair sharing and may result in business interests having to be sold, transferred or restructured to meet the spouse or civil partner’s claim. Unless proper consideration is given to all of the possible legal implications prior to the structure of the business being altered, this may cause unintended consequences in the event of the breakdown of the marriage or civil partnership. The legal position is not always clear and may require to be litigated.
The legal position may also be problematic for cohabitees. If a couple choose to cohabit rather than marry or enter into a civil partnership, the starting point is that each party retains their own assets and debts on separation. This includes business interests. Therefore, in a scenario where one cohabitee acquires an interest in the other cohabitee’s business, they will be entitled to retain that interest on separation. As it stands, there is no mechanism in family law for one cohabitee to seek the transfer of the other cohabitee’s business interest other than by agreement. Even if both parties are in agreement, the transferor would be entitled to receive the value of the interest in exchange – which again, may not have been intended when the interest was acquired.
The good news is that by seeking comprehensive family law advice prior to taking the business decision, it is possible to avoid the unwanted consequences arising from a breakdown in your relationship. Having a Pre- or Post Nuptial Agreement or Cohabitation Agreement prepared, often alongside an alteration to an existing Partnership Agreement, Shareholders’ Agreement or other company documents can regulate how the business interest will be treated on separation, divorce or dissolution and provide clarity and certainty at a difficult time.
