Business property may not always be matrimonial property in cases of divorce - Fiona Sasan

Should I transfer shares in my business to my spouse? The short answer from a family law solicitor is absolutely not!

Fiona Sasan is a Partner with Morton Fraser

All too often we come across clients who have restructured their business on the basis of tax advice without consideration or warning of the consequences in relation to family law. We strongly recommend that clients take advice from a family law perspective.

The situation often arises that a client has separated from their spouse and wants to sort out the finances. The client runs a successful business which they built up with blood, sweat and tears prior to the marriage. The client received tax advice a few years ago during the marriage to either incorporate their sole trader business or partnership into a limited company, or transfer shares in their limited company to their spouse.

The client is at pains to emphasise that this was done purely for tax purposes and their spouse is not involved – or even interested – in the day-to-day running of the business. The client owned the business before they met their spouse. Surely their spouse is not entitled to half of their business which they have worked so hard for?

The starting position in Scots law is that matrimonial property is shared fairly between spouses on divorce. The assumption is that fair sharing is equal sharing. Matrimonial property is property acquired by either spouse during the period of marriage, other than by way of gift or inheritance.

If you own a business prior to the marriage or if a business is gifted to you or inherited by you during the marriage, as long as you continue to own that business in the same form throughout the marriage, it will not be considered "matrimonial property" and will effectively be ring-fenced from the pot to be shared with your spouse on divorce.

By incorporating your business during the marriage, you, and possibly your spouse if they are to receive shares too, are acquiring new shares - and those shares acquired will be considered as matrimonial property and will enter the pot to be shared on divorce.

By transferring shares in your business to your spouse during marriage, your spouse is acquiring shares during the marriage and those shares will be considered as matrimonial property, and also enter the pot.

By simply changing the way you hold your business interests – i.e. incorporating your sole trader business during the marriage –you have converted your previously ring-fenced business into matrimonial property.

Once shares in a business are considered as matrimonial property they are in the pot for sharing. The spouse who set up the business then faces the challenging and often expensive battle of trying to justify a departure from the presumption of equal sharing in relation to the value of the shares.

From my experience, many clients are not aware that re-structuring can convert a ring-fenced business into matrimonial property. There are lots of ways a family law team can advise you to ensure you make an informed decision before re-structuring your business and assist you in putting in place the measures to ensure your business is protected.

Fiona Sasan is a Partner with Morton Fraser