The great divide

It’s a sad fact that as the Christmas holiday fades into memory many couples decide they’d like their marriage to become a thing of the past too. What do entrepreneurs in this position need to consider?

Divorce can be a costly affair: just ask former footballer Ray Parlour. He had to pay his ex-wife more than a third of his future earnings following a court ruling in 2004.

Karen Parlour was awarded a personal maintenance allowance of £250,000 a year.

However, the Court of Appeal then increased the amount to £406,500 to be reviewed after four years.

The award was in addition to a £250,000 lump sum, two mortgage-free houses worth more than £1 million and £12,500 worth of maintenance per year for each of the couple’s three children.

In the majority of cases, matrimonial assets are usually split 50-50, but this award was made because Ray Parlour’s income was so high that, after both parties’ reasonable needs and those of the children were taken on board, there was still a substantial surplus.

The idea behind the annual award of almost half a million pounds for four years was to encourage Karen Parlour to invest, or to set aside enough cash, so that after the four-year period was up she would be able to have a clean break and therefore support herself. It also reflected her part in assisting him earlier in his career.

It is important, however, to stress that the Parlour case was one of a kind and judges treat each case uniquely.

According to the latest figures from the Offi ce for National Statistics, in 2010 there were 119,589 divorces in England and Wales.

This is an increase of 4.9 per cent on the 113,949 recorded in 2009 and is the fi rst rise since 2003.

The figures for 2011 will probably show an increase in divorce rates, too, given the current economic situation.

Samantha Hillas, a barrister with Atlantic Chambers, says, “We are more aspirational than ever before and, as the current economic climate dooms many of those aspirations, there is no doubt that the resulting general unhappiness and discontent has had an impact on the divorce rate.

“The worldwide economic downturn has affected every aspect of a divorce lawyer’s practice.”

When seeking a divorce both parties have to give a full and frank disclosure of what they are worth. The assets that they have, whether these be property, savings, income or pensions, are then split in a way that the judge deems fair.

For an entrepreneur, this obviously means a valuation of their business is required. Accountants will examine at least two years’ worth of accounts but they usually go back a lot further than that and will go through your business’s books with a fine-tooth comb, so it pays to be prepared.

Financial settlements are based on a number of factors including length of marriage, each individual’s contribution to the business and the presence of children.

Sarah Thompson, partner in the family department at Russell Jones & Walker Solicitors, says that it doesn’t usually make much of a difference if one of the couple was not actively involved in the business.

“Contributions to the marriage are considered equal whether they are financial contributions, or child rearing, or homemaker contributions,” she adds.

It is rare though, according to Thompson, for a court to order the sale of a business to provide a maintenance settlement.

“The court will be very, very reluctant to make someone sell a business because a business generates income, so a judge will be reluctant to order the sale of the goose that is laying the golden egg,” Thompson says.

She says that most judges will award other assets as part of a settlement, such as the matrimonial home, or pensions and endowment policies, in order to protect the business so it can continue to generate an income.

However, problems can arise when the business is owned by both the husband and wife but is effectively run by just one, says Hillas.

She notes that it is not unusual to see a wife, or husband, listed as co-director and equal shareholder of the business even though they may never have played any part in the running of the company.

So, according to Hillas, entrepreneurs will try to buy out their spouses’ shares if it is permitted under their company’s articles.

If they cannot afford to buy out their spouses, the court will try to find a solution which will leave the entrepreneur in sole control where the business is their sole livelihood.

“In some cases, however, this may be impossible to achieve, especially if the business represents by far the largest asset and the husband [assuming that the husband is the entrepreneur in this case] is unable to raise the funds for a buyout,” Hillas states.

If it is necessary for the wife to retain shares, Hillas says it would be wise to seek undertakings from her that she will not interfere in the day-today running of the firm.

When it comes to passing assets between two partners, it is best to try to do this in the first year of separation, because during this period any such transfers are free of tax.

Lisa Dicken, partner at accountancy firm Hurst, says that if you do it after the first year of separation then you will lose spousal exemption and have to pay capital gains tax at a rate of 28 per cent.

Hide and seek
Although it is illegal, some entrepreneurs have been known to hide or disguise their assets.

Dicken tells us that business owners have been known to try to devalue their assets by stripping out cash or transferring shares to other family members to make it look as if they are not the majority shareholder in their business.

However, Dicken advises against such practices: “It would certainly be frowned upon and if there was implication of fraudulent activity there then the redress might be in the criminal courts as opposed to the divorce courts.”

Tricia Cottrell from law firm Hill Dickinson says if you do hide or disguise assets then you will be penalised by the judges not only in costs, but also in the size of the award they decide to make.

“My advice is don’t do it. You have to hit with a straight bat because you could be penalised if you don’t,” she says.

The amount of maintenance payable is based on net income rather than gross income (so if you have to pay £250,000 a year maintenance it will cost you almost double that, assuming it is paid out of earned income) and it can be fixed-term or on a joint-life basis.

Spouses do not generally pay any tax on maintenance received.

Hillas says that in some cases it might be worth considering other forms of income for the divorcing spouse, such as a transfer of shares, as this could generate an income by way of dividends.

Judges are, however, increasingly turning to longterm maintenance deals, in which business owners pay their ex-partners over a number of years because they are unable to take a lump sum from the business or raise any finance.

Linda Cummins, head of wills at legal firm Goldsmith Williams, says it is also important to consider the impact divorce will have on other legal arrangements, such as wills, trusts and lasting powers of attorney.

Divorce does not revoke your will but it can invalidate any gift in it to your ex-spouse or their appointment as your executor.

Cummins advises updating your will if you have an ex-spouse listed as your sole executor.

“If you don’t review your existing will and you die before the decree absolute is granted, you are still legally married so your estate will pass to your spouse if, as most couples do in their wills, they are named as the sole beneficiary,” she says.

However, if you die without having made a will, a court will decide what happens to your assets.

Cummins explains that a soon-to-be ex-spouse will inherit the first £250,000 plus personal possessions and life interest on one half of the residue if you have children.

“The remaining half goes to your children absolutely. If you don’t have children, parents or siblings, then your soon-to-be-ex stands to receive the lot.

“If you do have parents or siblings your soonto- be-ex receives the first £450,000, personal possessions and half of the remainder and your parents (or siblings) get the other half,” Cummins states.

You may also want to think about revoking any lasting power of attorney that you set up appointing your spouseas the attorney to run your business should you become incapable of doing so.

“The same reasoning applies to the appointment of replacement trustees for any trusts you have set up if you feel it would be inappropriate for your ex-spouse to continue in that role.

“You may, however, wish to retain them as a trustee if it was a trust for any children of your marriage Cummins states.

So how can you avoid paying out a huge sum in the event of a divorce? There are three (legal) things you can do.

You could simply not get married in the first place. Thompson says this is the best thing to do to protect your assets upon separation, as co-habitees have very few, if any, rights.

If, however, you insist on walking down the aisle you could always get a prenuptial agreement (prenup), otherwise known as an ante-nuptial agreement or pre-marital agreement.

A pre-nup is a contract entered into prior to marriage and, although they are not legally binding, providing they are written by a professional legal expert and contain a full financial disclosure, courts will be very reluctant to overturn one, especially since the outcome of the Radmacher case, Thompson says.

In 2010, the Supreme Court said that pre-nups should have “decisive weight” in English divorce courts after multi-millionaire Katrin Radmacher’s ex-husband challenged a pre-nup that the pair had signed in Germany before they married and divorced in England.

He argued that the agreement had no status in English law. The Supreme Court disgreed.

Judges can overturn prenups but they would probably only do this if the contracts were grossly unfair.

If you are considering a pre-nup then you will have to enter an agreement a sufficiently
long time in advance of the wedding ceremony to avoid an allegation of undue influence.

Elizabeth Hassall, head of the family division at Gateley Manchester, tells us there is no law regarding the cut-off period for a pre-nup, but they have to be drawn up and signed no later than three weeks before the ceremony.

Thompson says prenups, which are popular in Europe and the US, are not just for the wealthy.

She says that they are growing in popularity, particularly for people who are planning to get married for the second time and already have a firmly established business.

However, if you were a hopeless romantic and walked down the aisle without convincing your fiancé(e) to sign a premarital waiver, then fear not.

Fiona Davidson, partner in the family law team at Weightmans, says that if the business is established after you have already tied the knot then you could take out a postnuptial agreement before the marriage becomes difficult (though it might start to when you drop that particular bombshell at the breakfast table –ed).

People use post-nups for various reasons, such as to combat inheritance issues, to safeguard business successes, to protect against business failures and if they have won the lottery.

Post-nups will, Davidson says, give the option to consider a sensible division of assets should you decide to separate in the future, making things a lot less complicated if a divorce is on the cards.

Picture: His divorce might have got Henry VIII excommunicated but at least he didn’t have to worry about a pre-nup

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