A divorce is always challenging for your clients because, as well as the emotional turmoil, they must consider the financial issues that may arise. Couples need to decide how to separate their finances and what their individual positions will look like after the divorce is finalised.

All these complications are amplified when there is a business to consider.

In these situations, questions about who controls the business, the value of various assets, and the income generated by the company are all intertwined. Unpicking these elements and agreeing on a satisfactory outcome for both parties is difficult.

Here are five things to think about when handling a business owner’s divorce.

1. How the business will continue after the divorce

The first key question to answer is what will happen to the business on divorce, and there are several options to consider.

Technically, there is no reason why both parties can’t run the business together, but this may not work for most divorcing couples.

This means deciding who will continue running the business, and what involvement the other person will have. For example, will one party buy the other out and take full control of the business, or will both retain a stake in the company?

These decisions must be made before you can consider the practicalities of dividing the assets.

2. How the company will be valued

During the divorce process, the business must be valued to ensure assets are split fairly. Valuations will also be needed if one party plans to buy out the other.

Several variables may be considered when valuing a business:

• Liquidity – The business is valued based on the level of easily accessible cash it holds and how quickly assets could be liquidated.
• Projected income – Valuations may also consider how much the company is expected to earn in the next few years.
• Assets – Instead of considering liquidity or projected income, the business could be valued based on the various assets, including commercial properties, equipment, and stock.

The final valuation can differ significantly, depending on which methods are used. It’s important to consider the type of business and how to achieve the most accurate valuation. For instance, a largely service-based business with few assets might be more suited to a valuation based on liquidity and income.

There is also the potential for one person to challenge the valuation if they’re not happy with it. That’s why it’s important to work with experts who can provide a reliable valuation and justify it, if necessary.

Once you have a final figure, you’ll then need to consider whether it is feasible for one person to buy the other out of the business, and how they will fund this settlement.

3. The tax implications of drawing wealth from the business

When dividing assets, your clients may need to draw wealth from the business, and this can increase tax liability.

For instance, if clients wind the business down and sell assets, they may pay some Capital Gains Tax (CGT) on any profits they make.

Alternatively, they might draw dividends to extract wealth from the business and divide it with an ex-partner or buy them out.

As your clients have various tax-free allowances to use each year, it’s important to time wealth extraction carefully to limit tax, where possible. This is something we can advise on.

By reducing the tax liability, your clients retain more of their wealth, and both parties receive a larger settlement.

4. Where pensions fit into the settlement

Pensions are often overlooked during divorce, despite likely being one of the largest assets your clients hold.

In some cases, it’s beneficial to split pensions evenly between the couple. This is particularly true if one person has considerably more than the other in pension wealth. By sharing them equally, you can ensure that both parties have a healthy retirement fund.

Alternatively, couples might offset a large pension against another significant asset, such as their home. In this case, one person would keep the property while the other retains their pension, if they are of similar value.

You may want to factor pensions into conversations about how the business will be divided, as they could offset one another in this way.

5. The importance of professional, joined-up support

As you can see, there are many important financial considerations when handling a business owner’s divorce.

To give the client the best possible outcome, solicitors and financial planners must work together to provide joined-up support.

As you manage the legal aspects of dividing the business and the wider estate, we can advise clients on the financial challenges to ensure both parties come out of the divorce in a strong position.

Get in touch

To discuss how we could help your clients navigate their finances during a divorce, email info@blueskyifas.co.uk or call us on 0118 987 6655.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate tax planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.