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Contractor Doctor: We’re divorcing – what happens to our contractor limited company?

Dear Contractor Doctor,

I’ve been an interim management contractor for seven years, using a contractor limited company that I launched and I co-own with my spouse. He is the company secretary and a director, but does not contribute fee income.

We’ve found ourselves in the distressing circumstances of our relationship breaking down and we’re planning on going through with a divorce.

When we do divorce, what happens to my contracting limited company?

Thanks

Sarah

Contractor Doctor says:

“The first step for any contractor going through divorce proceedings is to engage a top-notch solicitor expert in family law, says David Colom, of contractor accountant D J Colom.

“With an estimated third of all marriages in the UK ending in divorce, this is a situation I have had to manage on many occasions,” he explains. “Based on that, I know that good legal representation is essential, particularly if the relationship between contractor and spouse has deteriorated to the extent that the divorce is likely to get complicated and messy.

“In a contractor’s case, the accountant has various small parts to play in providing information to the legal teams. Naturally, we also have our continuing professional duty of care to the contractor limited company and its directors, in determining the best way forward for the business.”

However, Colom says that, in the vast majority of contractor divorce cases he has dealt with, the contractor limited company is typically closed down and the main fee-earning spouse sets up a new one as soon as practicable to start trading afresh.

And he warns against continuing to trade with the old company, particularly if there are assets to distribute, as it can get quite complicated when trying to unpick the old from the new.

Determining assets and asset values

Colom says that in most cases he has seen, the spouse who is not the main contractor fee earner would have some claim over the contractor’s assets, although he stresses that contractors should take expert legal advice on this issue.

“If the spouse has a claim over the contractor’s assets, then these need to be identified, as they’re likely to include the company assets as alongside more obvious private assets, such as the couple’s home and any savings.

In a contractor's case, the accountant has various small parts to play in providing information to the legal teams

David Colom, D J Colom

Where there is money that has been allowed to accumulate in a company over time, that’s clearly a tangible asset that can be readily identified and disbursed by using Section 1030A or Entrepreneur’s Relief.

Valuing shares

However, the situation can often be more complex. Colom gives an example where both spouses own 50% of the shares in a contractor limited company that has one fee earner, plus a spouse acting as company secretary and director, but who is not contributing to the £80,000 a year net earnings the contractor generates.

“If the business earns net £80k a year, each spouse’s share is £40,000 as they are both 50% shareholders,” he says. “But what value does that place on a share over, say five years of a post-divorce settlement? Should it be five times the earnings? This is where accountants play their part in supplying their expertise in company valuations.”

Whatever the scenario, and subject to a contractor’s individual circumstances, Colom’s advice is generally to shut down the company, take out the assets and for the contractor to be up and running with a new contractor limited company as soon as possible.

But he concludes by again stressing the need for expert legal advice: “If a divorcing contractor finds themselves in a meeting with their spouse’s legal team, it’s much the same as a contractor taking on HMRC alone. The solicitors will push the boundaries far more with an unrepresented contractor, much as HMRC takes liberties with contractors who attempt to defend an investigation themselves.”

Good luck with your contracting!

Contractor Doctor

Updated: 01 April 2012

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