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Does Your Business Count as a Marital Asset in Divorce?

Key Points

  • The courts in England and Wales treat a business interest as a financial resource under section 25 of the Matrimonial Causes Act 1973, regardless of which spouse built the company.
  • The difference between drawings and retained profit matters enormously: profit sitting within the company may be treated as available to the owner even if it has never been extracted.
  • Expert valuation evidence is almost always required in contested cases. The methodology chosen, whether earnings-based, asset-based, or market-comparative, can produce dramatically different figures.
  • Courts are reluctant to order the sale of a trading business and will generally prefer to offset its value against other assets, applying an illiquidity discount where warranted.
  • Pre-nuptial agreements and well-drafted shareholders’ agreements give business owners meaningful protection if a marriage breaks down, reducing both uncertainty and cost.

When a marriage ends, and one or both spouses own a business, financial proceedings become considerably more complex. The company is treated as a matrimonial asset, so its value forms part of the pool. That means the court has to work out who controls it, how much income it generates, and how easily it can be turned into cash. If you are a business owner facing divorce in England or Wales, understanding how courts approach this question is the starting point for any sensible strategy.

The law in this area is set out in section 25 of the Matrimonial Causes Act 1973, which requires the court to look at all the circumstances of the case, including the welfare of any children under 18. They also consider the income, earning capacity, property, and other financial resources that each party has or is likely to have in the foreseeable future, including business resources.

The complicating factor for many owner-managed businesses is that directors routinely take modest salaries and draw dividends rather than pay themselves a wage. Once divorce proceedings begin, the court does not simply accept what appeared on the last tax return. It looks at what the business is genuinely capable of generating.

The courts take on business value.

The leading authority in high-value cases remains Charman v Charman (No 4) [2007] EWCA Civ 503. In this case, the Court of Appeal was dealing with £131 million accumulated through insurance underwriting. The court confirmed that the starting point in long marriages is equal division and that any departure from equality requires justification. The husband’s special contribution argument succeeded in principle, but its effect was limited: the court said the exceptional contributor was unlikely to receive more than two-thirds of the total assets, placing the realistic range somewhere between 55% and 66.6%.

On the specific valuation of private company shares, in the case of Martin v Martin [2018] EWCA Civ 2866, the Court of Appeal worked back from the value of shares at the end of the marriage to establish what existed at its start. The judgment was critical of expensive attempts to value shares at multiple historic points, preferring a more pragmatic approach. This means that pre-marital growth in company value may receive different treatment from growth generated during the marriage, but establishing that distinction requires careful, contemporaneous evidence.

Non-disclosure is also a serious matter. In FRB v DCA (No 2) [2020] EWHC 754 (Fam), Cohen J found that despite family structures apparently distancing the husband from substantial assets, he retained beneficial interests. As a result, the wife received £49 million. The case made clear that the duty of full and frank financial disclosure runs throughout proceedings, and courts are experienced in identifying structures designed to understate a spouse’s true wealth.

How courts treat income and retained profit

One of the most contested issues concerns income assessment. A director of a private limited company can extract value through salary, dividends, director’s loan accounts, and retained profit. Courts treat these differently, and no single method of extraction is accepted at face value. Courts generally look at three to five years of accounts and tax returns to build a picture of sustainable earnings. Where drawings have fallen sharply around the time of separation, judges tend to treat that as a pointer to deliberate suppression and may assess income by reference to the business’s demonstrated earning capacity rather than what was actually paid out. The question is not what the director chose to take home, but what the business was reasonably able to provide.

Retained profit, which sits within the company as reserves, presents a further difficulty. Courts treat reserves as a resource where the owner-director has the practical ability to declare a dividend and withdraw them. Liquidity then becomes central: can the money actually be removed, and what would the tax cost be? This usually requires a forensic accountant with specific experience in financial remedy proceedings.

Valuation methods and the role of the expert

No single valuation method applies in every case. The appropriate approach depends on the nature of the business, its asset base, its reliance on the personal skills of the owner, and the sector in which it trades. The earnings-based method, often called the ‘future maintainable earnings’ approach, is the most common for profitable trading companies. A sustainable earnings figure is multiplied by an industry-appropriate multiple to produce a capital value. Choosing that earnings figure, whether to use profit before or after the owner’s salary, and whether to strip out one-off items, is regularly disputed by the parties. Asset-based methods suit property-heavy or investment-holding companies. Market-comparative approaches look at recent transactions in comparable businesses. Each produces a different number, and the gap between the highest and lowest plausible valuations can be substantial.

In contested cases, the court typically appoints a single joint expert who reports to both parties and to the court rather than acting as a partisan advocate for either side. The court retains the right to depart from expert evidence, but significant departures are unusual. Both parties may also argue for an illiquidity discount on private company shares, reflecting the fact that those shares cannot be sold as easily as cash or listed equities. That discount can materially reduce the value attributed to the business owner in the overall division.

Protecting the business going forward

Courts have wide powers under the Matrimonial Causes Act 1973 to deal with business interests. Section 24 permits the transfer of shares. Section 24A permits a sale, though judges often avoid taking this approach if the business is a live trading enterprise and there are other assets available for offsetting. Where both spouses want to avoid disrupting a profitable company, the more common resolution is that the business owner keeps the company, and the other spouse receives a greater proportion of liquid assets, such as property, pensions, or cash.

Where third-party shareholders exist, or employees would be affected by a change in ownership, future control becomes a pressing concern. A minority shareholding awarded by court order may leave the receiving spouse locked out of management decisions. A well-drafted shareholders’ agreement, negotiated before any matrimonial difficulty arises, may set out the valuation method to be used in these circumstances and substantially reduce the scope for dispute. Pre-nuptial and post-nuptial agreements can also address how business assets will be treated on divorce. They are not automatically binding in England and Wales, but courts give them considerable weight where both parties entered into the agreement freely, with full financial information and independent legal advice.

Practical guidance for business owners

Business owners are advised to take specialist advice at the earliest stage of proceedings. The financial disclosure process requires providing company accounts, management accounts, director’s loan account records, and tax returns. Incomplete or late disclosure will damage credibility with the court. In my experience, I would recommend:

  • Instructing a forensic accountant early to assess the likely range of valuations before the other side commissions their own.
  • Ensuring that all retained profits, director’s loan account movements, and dividend decisions are accurately reflected in the accounts and can be explained clearly.
  • Taking advice on the tax consequences of different settlement structures before agreeing to anything. Capital Gains Tax and Income Tax can substantially reduce the net figure available to either party.
  • Reviewing any existing shareholders’ agreement immediately. It may contain provisions relevant to divorce or change of ownership that affect the negotiating position from the outset.
  • Where spousal maintenance is in issue, understanding that courts assess ongoing income by reference to what the business is reasonably capable of providing, not what the director has chosen to draw.

Specialist legal advice is essential. Every case turns on its own facts, and the wide judicial discretion under the 1973 Act means that outcomes can vary considerably depending on the evidence presented and the arguments made. Askews Legal’s family law team advises business owners at all stages of financial remedy proceedings.

Frequently Asked Questions

Will my business always be included in the matrimonial pot?

Yes, a business is a financial resource under section 25 of the Matrimonial Causes Act 1973 and will be considered regardless of whether your spouse had any direct involvement. Pre-marital origin may reduce the weight given to the sharing principle, but it does not remove the business from consideration.

Can the court force me to sell my company?

Yes, the court has power under the Matrimonial Causes Act 1973 to order a sale, but judges are very reluctant to do so where the business is a live trading enterprise. The preferred approach in most cases is to offset the value of the business against other assets, so the owner retains the company.

Does retained profit in the company count as my personal wealth?

Yes, retained profit that the owner-director has the practical ability to extract will generally be treated as a resource available to that party, even if it has never been drawn. The court will want to understand whether it can be distributed by dividend and what the tax cost of doing so would be.

How is my income assessed if I take low drawings?

Courts assess income by looking at the full picture across several years: salary, dividends, director’s loan account movements, and the underlying earnings of the business. A pattern of low drawings in the period approaching separation may be treated as deliberate suppression, and the court may attribute a higher income figure based on the company’s demonstrated earning capacity.

Can a pre-nuptial agreement protect my business?

Yes, a properly drafted pre-nuptial agreement that specifically addresses business assets can substantially reduce uncertainty on divorce. While not automatically binding in England and Wales, courts give considerable weight to agreements freely entered into with full financial disclosure and independent legal advice for both parties.