How is your marriage? Practical family law advice for corporate lawyers

As a corporate lawyer, your focus is naturally locked on the commercial interests of your client’s business. There are many creative ways that you may use to ensure tax efficiency and ongoing commercial success for your client’s business ventures. But there is also a silent and potentially destructive variable to consider that rarely appears on your client’s balance sheet: the Family Law (Scotland) Act 1985.

Without even realising it, your standard corporate maneuvers can trigger catastrophic family law consequences for your clients. By reshaping a company’s capital structure, you may inadvertently transform a completely protected, excluded pre-marital asset into “matrimonial property” which becomes subject to a fair (and often equal) division upon divorce. To shield your clients from avoidable financial exposure, and to protect your firm from negligence claims, there is one simple, non-negotiable question you must integrate into your client onboarding process before executing any major corporate change: “How is your marriage?”

The Key Takeaway

Before executing any restructure, share allocation, or capital reorganisation, make sure to check your client’s marital status. Under Scottish law, an otherwise flawless commercial transaction can instantly convert non-matrimonial wealth into a matrimonial asset, leaving it wide open to a claim if a divorce is quietly brewing on the horizon.

The Trap: Section 10 of the Family Law (Scotland) Act 1985

In Scots law, the definition of “matrimonial property” is defined by Section 10 of the Family Law (Scotland) Act 1985. Matrimonial property comprises all property acquired by either party during the marriage, up until the relevant date of separation. Crucially, assets acquired before the marriage, or received via inheritance or third-party gift during the marriage, are excluded from the matrimonial pot.

However, this protection is entirely contingent on the asset remaining in its original form. The moment a protected pre-marital asset, gift or inheritance changes its form, character, or legal ownership during the marriage, it is deemed to be a fresh acquisition. This is the trap of transformation.

Anatomy of an Inadvertent Mistake

Imagine a client who founded a highly successful engineering firm five years before they got married. Commercially and historically, it belongs entirely to them. Under standard Scots law, those original shares are excluded from the matrimonial pot if they were to later divorce.Ten years into the marriage, you advise them to implement a new holding company for tax planning, rolling the original shares into the new entity. Alternatively, you issue a new class of shares to optimise dividend extraction. Under the 1985 Act, the original, safe pre-marital shares have ceased to exist in that form. The freshly issued holding company shares or new share classes were “acquired during the marriage.” You have just inadvertently pulled a multi-million-pound pre-marital asset directly into the matrimonial pot and now the client has the uphill battle of fighting for an unequal division of the asset as a special circumstance.

Critical Corporate Triggers to be aware of

Corporate lawyers must be vigilant. Routine business transactions routinely crossover into family law exposure. Be on especially high alert whenever a client requests any of the following updates:

• Share Division Schemes & Inter-Spouse Transfers: Allocating ‘B’ or ‘C’ class shares to a spouse to utilize their unused basic-rate tax band is a common income-splitting tool for business owners. However, if those shares are funded by or derived from a pre-marital company, you may have permanently matrimonialised a portion of that company’s value.
• Incorporating a Partnership or Sole Trading Business: If a client ran a business as a sole trader or within a traditional partnership before getting married, that interest is non-matrimonial. If you incorporate that business during the marriage, the newly issued shares represent a brand-new asset class acquired during the marriage, erasing the automatic pre-marital protection.
• Restructuring: Using corporate reserves or taking out commercial loans to buy out a departing shareholder fundamentally alters the underlying value and nature of the remaining equity. If these structural changes occur during the marriage, the resulting change in value or altered shareholding can be caught under the principles of the Act.
• Directors’ Loan Accounts: Mixing personal wealth with corporate funds via directors’ loan accounts can muddy the waters. If matrimonial funds are funneled into the company to assist with cash flow, the business asset risks becoming co-mingled, making forensic tracing incredibly complex. Likewise, positive Directors Loan Balances are treated as separate Matrimonial Assets in a divorce and so can negatively impact the Director in the divorce process.

Why “How is your marriage?” is a Vital Professional Safeguard

Clients rarely volunteer information about marital problems to their corporate lawyer – they see business and family as entirely separate areas of law. They assume that because a business belongs to the commercial sphere, a family court cannot touch it. They are very wrong about that.

The Scottish courts hold broad, sweeping powers to make financial awards upon divorce. While they rarely force the actual break-up of an active trading business, they routinely order large capital sum payments or property transfers based on the valuation of corporate shares. Likewise if your Client has given shares to their Spouse throughout the marriage to save on Tax, they will have to buy them back off of them at full market value to obtain them. If the cash is tied up in the company, a client may be forced to extract capital under highly disadvantageous tax terms in order to pay out the matrimonial settlement.

By asking about the stability of their marriage upfront, you gain the opportunity to pause the transaction and make them aware of the potential matrimonial consequences. If the relationship is rock-solid, it provides a perfect opening to introduce a Post-Nuptial Agreement to ring-fence the restructured corporate wealth. If the marriage is already fracturing, you can freeze the proposed restructure until a formal Separation Agreement (Minute of Agreement) is drafted, avoiding an accidental multi-million-pound mistake.

Additional Considerations: Corporate Governance

Aside from timing your corporate advice, you should always look at defensive structuring, including the drafting of the Shareholders Agreement. A well-drafted agreement can include conditions on share transfers, such as mandating a right of first refusal for the remaining Directors.

Second, remember that if both spouses are registered as directors or shareholders for tax purposes, standard corporate governance applies. A bitter separation can quickly lead to corporate deadlock. An aggrieved spouse with the correct titles can refuse to sign off on annual accounts, block vital commercial financing, or disrupt day-to-day operations. If they are also Employees, they have the same rights as any other employee, which can cause liability for the Company in that regard too.

Conclusion: A Shared Enterprise

A flawless corporate transaction is only truly flawless if it survives the test of time – including the personal lives of the directors and shareholders who sign it. Do not let your next great idea for tax planning or corporate restructuring become the centerpiece of a devastating divorce litigation.

Before you make any significant ownership changes, take a moment and ask the question. It is not intrusive; it is exceptional asset protection.

If you are a corporate lawyer navigating a complex restructuring with family law implications, or if you want to establish a reliable referral pipeline for clients needing Pre-Nuptial, Post-Nuptial, or Separation Agreements (Minutes of Agreement), contact BTO’s family law team today. We can protect the wealth that your work builds.