With over 40% of marriages in Scotland likely to break down, it is important for those in the farming community to take steps to protect their business interests if entering into marriage.
Farming divorces can present a number of complex challenges. These include the nature of the assets, difficulties in valuing them, and the fact that assets have often been passed down the family for generations. The use of farming partnerships and limited companies can further complicate matters.
The law in Scotland provides a system of rules whereby a couple’s capital and income may be redistributed when their marriage ends in divorce. Under the Family Law (Scotland) Act 1985, the net value of the matrimonial property should be shared fairly between the parties and the starting point is an equal share. Unequal sharing can apply if justified by special circumstances, such as the value of an asset being linked to the sale of another asset held prior to the marriage.
It is not uncommon for farmers to bring in their spouses as partners in the family farming business – their accountants or financial advisors may recommend such arrangements to reduce tax liabilities. Forming a new partnership, or the transfer of assets between spouses, may have the effect of converting pre-marital assets (belonging to one party) into matrimonial property (belonging to both). By entering into a prenuptial or postnuptial agreement a farmer may protect his or her assets by ring-fencing them so that they will continue to be treated as non-matrimonial property in the event of a divorce.
Although a couple living together without the formality of marriage do not acquire the same rights as spouses or civil partners, since 2006 a cohabitant in Scotland may pursue a claim for financial provision on the breakdown of such a relationship. It is not widely known that the law does not provide for any minimum period of cohabitation. However, any such claim must be pursued in court within one year of the breakdown of the relationship. It is common, therefore, to put pre-cohabitation agreements in place to provide certainty and protection for parties bringing valuable assets into a relationship.
Provided that such agreements are carefully drafted and the other partner or spouse is given an opportunity to obtain independent legal advice, they should be enforceable if challenged in court. The law in relation to prenuptial agreements has developed in England in recent years to move closer to the law in Scotland. The English ‘common law wife’, the equivalent of our ‘bidie in’ will, however, have to wait to acquire cohabitation rights as successive governments have failed to introduce equivalent legislation south of the border.
Once the preserve of the rich and famous, prenuptial agreements are now regarded as mainstream. While they may not be terribly romantic, they can be a practical way to prevent the expense and uncertainty associated with battles in the divorce courts.
Case study
Donald and Margaret Farmer’s family have farmed at Inverkirkaig for several generations. Their son, John, will soon start the third year of his agricultural degree at Scotland’s Rural College (SRUC). They have bought John a flat and have helped him furnish it. John wants to move his girlfriend, Helen, into the flat with him. Helen has made no contribution to the purchase of the property but will pay a share of the mortgage and running costs.
Mr and Mrs Farmer have encouraged John to have a cohabitation agreement drawn up that will provide that Helen will have no claim in relation to the property or any increase in its value should their relationship break down. She would waive her rights as a cohabitee in terms of the Family Law (Scotland) Act 2006.
Mr and Mrs Farmer are also thinking of restructuring the farm and bringing John into the partnership. They have instructed their business lawyers to advise on the options available to them.
If John and Helen decide to get married, Mr and Mrs Farmer also want John to enter into a prenuptial agreement with Helen, making it clear that in the event of their separation and divorce, his interest in the farming business will not constitute matrimonial property and Helen will not have a share in the value of the business assets. John and Helen should obtain independent legal advice.
Shaun George is Head of Family Law at Brodies LLP. For more information contact Shaun on 01224-392531 or at shaun.george@brodies.com.