Divorce is rarely straightforward, but when one spouse is self-employed, the process can become significantly more complex. Unlike salaried employees, whose income and assets are often easier to assess and verify, self-employed individuals can have complicated financial structures that make determining a fair financial settlement more challenging. Full financial disclosure is a legal requirement during divorce proceedings. However, when self-employment is involved, this process is often riddled with obstacles, potential manipulation, and, in some cases, deliberate obfuscation.
This article covers the key considerations and common complications you may face when divorcing a self-employed spouse.
Assessing income: reality vs. appearance
A significant issue in divorces involving a self-employed spouse is determining their actual income. Unlike someone who receives a regular payslip, someone who is self-employed may have an irregular or unpredictable income. They may draw money in the form of dividends, retain profits in the business, or vary their drawings depending on lifestyle choices or strategic planning.
Tactics to look out for include:
- Under reporting income: Some self-employed individuals may intentionally minimise their declared income during divorce proceedings to reduce maintenance obligations or their financial liability in a settlement.
- Delaying invoices or payments: A spouse may postpone invoicing clients or encourage clients to delay payments until after the divorce is finalised, making it appear as though they have less income than they actually do.
- Inflated business expenses: It is not uncommon for self-employed spouses to exaggerate or misclassify personal expenses as business-related to reduce their taxable and visible income.
A forensic accountant may be required to analyse bank accounts, tax returns, profit and loss statements, and other financial documentation to uncover the true financial position.
The business as an asset
If the self-employed spouse owns a business, either solely or jointly, the business itself may be treated as a matrimonial asset subject to division. Even if the business was started before the marriage, its growth during the relationship and how it contributed to the family’s lifestyle may factor into the division.
Key considerations include:
- Valuation of the business: Determining the market value of a business can be complex. An expert valuation may be necessary, taking into account assets, liabilities, projected income, goodwill, and market position.
- Liquidity: Even if a business is valuable on paper, it may not be liquid. This can complicate division if one spouse needs to be “bought out.”
- Ongoing involvement: If both parties worked in the business, or one was heavily reliant on income from it, questions arise about future involvement or compensation for giving up a role.
Pension contributions as an income diversion
A self-employed spouse might increase pension contributions during divorce proceedings to reduce their visible income. While pensions are part of the marital pot and can be subject to pension sharing orders, these contributions might skew short-term income calculations, such as that used for spousal or child maintenance.
The court can consider excessive pension contributions as a way of reducing available income. If the contributions are found to be unusual or increased significantly in anticipation of the divorce, the court may adjust its award accordingly.
Transfer or concealment of assets
Another common complication is the movement of assets or income to third parties to avoid division. This might include transferring property or business shares to relatives or setting up new businesses under someone else’s name.
Red flags to look out for include:
- Sudden changes in business ownership or directorships
- New accounts or loans taken out in others’ names
- Transferring savings or investments to family members
The court expects full and frank disclosure of all assets. If a spouse is found to be hiding assets, the court has the power to set aside transactions and make adverse inferences against the non-disclosing party.
What is the impact of self-employment on spousal and child maintenance?
Self-employment affects how maintenance is calculated. Unlike with salaried workers, where maintenance can be more predictable, fluctuating income makes it harder to set and enforce reliable payment structures.
Options include:
- Maintenance based on an average income over several years, rather than a single year
- Variable orders that can adjust payments based on income changes
- Review clauses that allow the case to be revisited if income changes significantly
If the paying party is suspected of manipulating their earnings, the court may make a notional assessment based on lifestyle evidence or historic earnings.
Addressing disclosure challenges and legal remedies
Self-employed individuals may be less forthcoming with financial information. The court requires both parties to complete a Form E – a detailed financial disclosure document which includes things such as income, assets, and debts. But even with this requirement, enforcement can be challenging.
What you can do:
- Request further documentation: Bank statements, tax returns, business accounts, loan applications, and even lifestyle analysis (e.g. recent holidays, car purchases) can be used to assess true wealth. An independent account may also be appointed to provide a true valuation of the business.
- Apply for a court order: If a spouse refuses to disclose information or provides incomplete documents, you can ask the court to compel disclosure.
- Instruct experts: A forensic accountant can uncover inconsistencies, hidden income, or manipulated figures.
Given the potential complexity and risk of financial misconduct, divorcing a self-employed spouse requires strong legal advice. Solicitors with experience in high-conflict financial cases and knowledge of business structures are essential. They can also help you anticipate the long-term implications of different settlement structures (e.g. lump sum vs. ongoing maintenance).
Divorcing a self-employed spouse presents a unique set of challenges. From hidden income to business valuations, and from complex pension strategies to asset transfers, it requires strategic thinking and detailed analysis. Transparency and full disclosure are the cornerstones of fair financial proceedings, but self-employment can muddy the waters.
If you find yourself in this situation, gathering documentation early and consulting both legal and financial experts will be crucial. The more informed and prepared you are, the more likely you will be able to secure a fair and balanced settlement that reflects the true financial circumstances of your marriage.
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