Divorces where the matrimonial property includes a farming business are often some of the most difficult and fraught ones to deal with. Problems can arise when either valuable land becomes matrimonial property or when a husband and wife partnership doesn’t go quite as intended.
Land becoming matrimonial property
The starting point for financial provision upon divorce in Scotland is to identify the matrimonial property and then divide its value fairly between the spouses. Many farms will have been acquired by the current proprietor either by way of gift or inheritance and as such, at the time of acquisition, would not have been matrimonial property. Problems arise however in the event that the gift is not truly a “gift” or the gifted or inherited asset changes in nature during the marriage. Two common, and not necessarily obvious, pitfalls to watch out for are as follows:
The LBTT submission receipt (or Stamp Duty receipt) – Whilst at first blush an interest in farmland may have been gifted to the current proprietor it is important to ensure that the LBTT submission receipt on the disposition transferring the land also records that the transfer is a gift. If the LBTT submission receipt records that the transfer has been for a consideration, the land will be matrimonial property. In that event the other spouse will be entitled to a share of the land’s value upon divorce.
Loan accounts – Has the farmland been truly gifted to a child, or do the accounts reveal the creation of a loan account as a tax efficient way of income being paid to parents after the farmland has been passed on to the child? The existence of a loan account would mean that the land has been transferred for a consideration, rather than a gift and thus is once more matrimonial property.
Husband and wife farming partnerships
Husband and wife partnerships can go horribly wrong if the principal partner does not have control of the business and its ultimate fate. In this regard it is essential to have a written partnership agreement which, amongst other things: weights the voting rights in favour of the principal of the business; limits the amount that the other partner can draw from the business, either by way of income or capital; and limiting the other partner’s ability to dissolve the partnership.
Although gifted or inherited land is not matrimonial property, the principal in a farming partnership should always be careful to ensure that the land does not find its way into the partnership accounts as a partnership asset. If it does, there is a very real risk that its value will need to be shared with the other partner in terms of the Partnership Agreement.
Pre-Nuptial Agreements can be a very useful tool to protect any inheritance or gifted assets in the event of divorce. Although can you do many things with a Pre-Nuptial Agreement, the most common thing we would do in a farming marriage is ring-fence the gifted or inherited assets (even if the gifted assets are not truly “gifted”) to protect their value in the event of divorce.