Divorcing with your own business: what to watch out for

Does your business go into the division?

That depends on your marital regime. If you married in a full community of property, the value of your business belongs to that community and your ex is in principle entitled to half of it. If you married after 2018 without a prenuptial agreement, the limited community applies: what you already had before the marriage stays yours, and what was built up during the marriage is shared. With a prenuptial or cohabitation agreement, the text of those arrangements decides.

Even if the business falls outside the community, a settlement may be needed. If you worked in your own business for years without taking a reasonable salary while the household had to live on that income, compensation may be owed to the community. If your partner worked in the business, also read a cooperating partner and the related deduction, because that role plays a part in the settlement.

How the value of your business is determined

The book value on your balance sheet is almost never the value used in a divorce. What counts is market value: what a buyer would pay. So that includes hidden reserves, for example a van or premises worth more than their book value, and sometimes goodwill. How that value is arrived at is covered in selling your sole trader business and goodwill.

With a sole trader business that leans entirely on you personally, there is often less goodwill than your ex expects: a successor will not buy a client base if the clients come for you. Conversely, a practice with contracts and recurring revenue can certainly have value. An independent valuation prevents an endless discussion and often saves more than it costs.

Deferred tax matters too. The value of your business still contains a future tax liability, because as soon as you stop or sell you settle up over the hidden reserves. That should be taken into account in the division, otherwise you pay out your ex on an amount on which you still owe tax later.

Tax partnership and the return in the year of the split

You are tax partners until the moment you separate: the divorce must have been filed and you must no longer be registered at the same address. Up to that date you may still opt to file as tax partners for the whole year of the split. That can be advantageous or not, depending on how your incomes compare and which deductions are in play. Read the main rules in being a tax partner as a freelancer.

Watch the allowances and your provisional assessment. If your household changes, your entitlement to allowances changes immediately, and you have to report that yourself. If you pay or receive spousal maintenance, it is a personal deduction for the payer and taxable income for the recipient. Child maintenance is not deductible. Work that through in your provisional assessment, otherwise you will be surprised later.

Avoiding having to settle up

The main tax pitfall is that the division is treated as a transfer of your business. If the business goes to one of you in the division, there are rules allowing that without immediate settlement, provided the one receiving it continues it and takes over the old book values. If it is documented wrongly, you settle up over your hidden reserves and goodwill without any money coming in to pay that tax.

In practice that means: have the tax implications reviewed by your bookkeeper before the divorce settlement is signed. A few lines in that agreement determine how the tax authorities see it. If you have to buy out your ex and cannot pay from cash, that also plays into the valuation; agree on instalments rather than a lump sum.

Also get the administrative side in order. A joint account that was also used for business, a car in your ex's name that you drove for work, a workspace in the home that is being sold: these are all items in your bookkeeping that change on divorce. From then on keep business and private strictly separate, so it is easy to explain later.

1. Find out which marital regime applies and what that means for your business.
2. Have the business valued and include deferred tax in the division.
3. Document the transfer or continuation correctly for tax before signing.
4. Adjust your provisional assessment and your allowances to your new situation.
5. Separate joint accounts, insurance policies and subscriptions from your business records.

Frequently asked questions