How is a Director’s Loan Account treated on divorce?
It is common practice for many business owners to take money out of their company on a regular basis from their Director’s Loan Account (DLA). How is this looked at if the business owner gets divorced?
Taking a closer look at this issue is partner Fiona Wood, a specialist in family law for more than 20 years and an expert in dealing with divorces which involve businesses, from the Group’s specialist family and children law practice, McAlister Family Law.
It is common practice for many business owners to take money out of their company on a regular basis from their Director’s Loan Account (DLA). At the end of the accounting year a dividend is often then declared, which is used to reduce or pay off the overdrawn DLA. This is seen by many business owners as a much more flexible and tax efficient way of taking money out of the company, rather than taking a large salary from the company or declaring dividends several times a year. Whilst this is common practice, how is this looked at if the business owner gets divorced?
Assets in divorce proceedings
Shares in a private limited company are usually considered an asset in divorce proceedings. Many companies are valued by an accountant within divorce proceedings. Whilst the DLA does not usually impact the value of the company, it is a liability that must be repaid to the company at some point by the owner of the DLA and will be taken into account in that respect. There are also tax consequences of having an overdrawn DLA.
As well as having a company/shareholding valued within divorce proceedings, an accountant is often asked to comment upon the sustainable income that can be taken by the business owner from the company going forward.
The historic income taken by way of salary and dividends is usually taken into account when considering this. Some business owners, when getting divorced, reduce the salary and dividends that they take from the company in the hope that this reflects a downturn in the business for valuation purposes. However, accountants are alive to the fact that the dividends declared in previous accounting years do not always reflect all of the profit that is available to be taken from a company.
Also, if the business owner continues to take a significant amount of money from their DLA, it shows that they have confidence in the business being able to declare sufficient income to repay this in the future.
Full financial disclosure
Expenditure from a DLA is subject to scrutiny within divorce proceedings. In divorce proceedings both spouses need to provide full financial disclosure. This includes providing a breakdown of all money spent from the DLA, for at least the last year, but in some instances going back further.
It is therefore wise to make sure that your expenditure from the DLA is not excessive, as you can be criticised for this within the divorce proceedings, just as you can be criticised for excessive expenditure from your bank accounts, which can be seen from your bank statements. A DLA is not something that can just be hidden within the company when you divorce, it is fully disclosable and will be considered within the divorce from both a capital/liability perspective and from an income/expenditure perspective.
If you are experiencing problems in your marriage it is important that you take advise from an experienced family law solicitor who is well versed in dealing with clients who have businesses. If you would like to know more about the issues raised here, please get in touch today. We are here to help.