June 2012

Where one or both parties in a matrimonial dispute control a family company, funding settlements can be complex.  This article outlines some ways in which funds can be extracted from a family company by its owners and highlights some of the financial implications.

A family company’s funds can primarily be used to provide a capital sum  or to increase the income  of one or both of the shareholders/directors.

Providing a Capital Sum

Repayment of loans  made by a shareholder/director to the company or of a directors’ current account is potentially a tax-effective way of making funds available.

Shareholders/directors may realise cash by selling assets  to the company which are owned by them but which have been used by it.  The Capital Gains Tax (CGT) position in relation to sales of business assets has been relaxed in recent years.

A shareholder can sell shares to a third party.  The CGT regime for such sales has become favourable in recent years.  Important financial considerations include the ease with which a buyer can be found, the terms of any potential sale (e.g. whether any payments are to be deferred) and the continuing role of the shareholder in the company.  Alternatively, the shareholding may be used as security for increased borrowings  by the shareholder.

The company may be able to release funds by   re-purchasing shares  owned by a shareholder. Although this is a potentially useful way of extracting funds, the administrative requirements are more complex than in the case of many of the other vehicles outlined in this article.

Increased pension contributions  by a company on a director’s behalf can increase the value of his or her pension fund.  The contributions will increase the director’s pension rights after retirement: they may increase the amount which can potentially be drawn down as a lump sum in the foreseeable future.

Increasing Income

A straightforward way of releasing funds to a director is to increase his or her salary or pay a bonus.  An important factor, however, is that employer’s National Insurance Contributions will normally be payable on the full amount of the salary and bonus.

The company must have adequate distributable profits to fund increased dividend payments.  The dividend will be taxable income in the hands of the shareholder.  A potential drawback is that the company will also have to pay dividends to other holders of the same class of share.

If a shareholder/director has made a loan to the company, or has a credit balance on his or her current account with it, the company can be charged interest  on a commercial basis for the use of these funds.  The interest will represent taxable income in the hands of the shareholder/director.

A shareholder/director may own some or all of the company’s trading premises and may not charge rent on an arm’s-length basis.  Any increased rents  charged to the company will be paid gross to the shareholder/director, who will be liable for income tax on the rents. 


The resources which are potentially available to a controlling shareholder/director of a family company include its readily realisable assets, primarily cash.  Although funds cannot be removed at will, as businesses need to retain assets to continue trading, there may be scope for raising funds through borrowing against revalued assets and/or the sale of surplus or under-utilised assets. If funds are extracted from a company, the directors will need to consider whether the business can generate the income to service any additional indebtedness. 

There are several routes by which funds can be released to an individual.  It is necessary, however, to establish as exactly as possible the overall financial and tax situation of the individual and the company when considering the best way of funding a divorce settlement.

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