Experts | Valuation of assets in matrimonial disputes

As a forensic accountant involved in numerous family disputes, the assets I see declared on Form E by parties to a divorce usually fall into four groups. The first is the marital home and other property investments. The second is contents and vehicles. The third is investments, pensions and savings accounts. The fourth is business interests either as shares or in a partnership.

In relation to the fourth group, I tend to become involved because assistance is needed in valuing business interests, mostly for owner-managed businesses (OMB), and to advise on inconsistencies in disclosures under the other headings that require clarification. The third group tends to be supplied by an IFA, the second by mutual negotiation - unless there are some unusual assets like classic cars - and the first by an estate agent surveyor. If the business includes a property portfolio then ways of dividing it to give both parties a share of ?the assets, liabilities and income is a ?question that gets referred to me because of the requirement for advice on the tax position where there is a lack of trust in business-related information supplied by regular advisers.

For example, I have had several cases as a single joint expert (SJE) where I have had to work with the surveyor to ensure that his schedule of properties coincides with mine, as not all properties are income producing so may get overlooked. He will then advise on the current market values and potential rental incomes available on vacant units then leave me to match up the mortgages, original cost and capital gains implications that have to be factored in because use has not been taken off the transfer facility available in the year of separation as this has not been addressed promptly enough.

Income and expenditure

Apart from the net value of the properties, I am also interested in both the income and expenditure that generates the taxable profit or loss and on the interest rate changes required to turn a profitable property into a loss making one to help, normally the wife, better appreciate the risks that she is inheriting by becoming a landlord. In one case this advice was given in response to queries by the judge while in another it arose during my attendance at a mediation session focusing on the financial aspects of the divorce. In both cases I had to explain to the parties and the judge or mediator the financial consequences of a variety of scenarios for division of the portfolio and of the risks when disposal of properties to ?raise cash is not necessarily the best option for the parties.

On a practical level I am normally asked to value a business as at the date of my report. That raises questions as to what accounting information is available and how recent it is. Most owner-managed companies are of a size where only abbreviated accounts are lodged at Companies House. They tend to be of little assistance because they give no indication of the size of a company in terms of turnover and profitability. What professionals in my situation need is the last three years of full statutory financial statements with detailed profit and loss account as submitted to HMRC, along with management accounts and budgets since the last year end, because there could be as much as 18 months of trading and shares are sold based on information that is only a few months old.

Many OMBs do not have budgets or formal management accounts but most use a computerised accounting package of some type that has a default management accounts layout for the profit and loss account and balance sheet. A few clicks on the keyboard will result in a print out allowing me to consider how a business has been performing. Often I obtain that during a visit, as I like to get a feel for trading performance and that is difficult if done solely from documents.

Another common item in OMB accounts is a loan account between the director/shareholder and the company. Small loans by the company arise on occasion but it is more common for the director to be owed money and that makes the balance in that account a separate asset, or liability, for disclosure in the Form E. I find that its separate disclosure from an estimated value of the company is regularly overlooked.

A further practical point on OMBs is that there may be overlap between business and personal costs. Most company directors now own their own car and charge mileage to the company for business use, which is more tax efficient than the previous benefit-in-kind regime.
The Form E will disclose the capital value and the running costs but may not net off the mileage claim income that is a valid business expense for the company and ?which is paid at rates that are tax free in the hands of the recipient if they comply with HMRC guidelines.

In many cases the director's loan account is one in joint names of the husband and wife and it is kept as a loan to the company by declaring dividends to cover the personal expenses being paid by the company in the first instance. This arises where the company credit card or cash drawings are used to pay for holidays or shopping as well as business costs. It also arises because the tax system effectively encourages shareholders to take the bulk of their remuneration by way of dividend so as to minimise the cost of NICs.

In one very profitable company, large dividends had been declared over several years but the funds were retained in the director's loan account, which was under the sole control of the husband and the wife was being told to pay tax bills on dividends that had not reached her bank account to enable her to finance the tax payments post-separation. He also stopped declaring dividends on her shares after changing the share structure against her wishes. We even got the situation that a tax refund she included in her Form E as a debtor was in ?his funds.

With dividends of a size that involve higher rate tax payments on account are calculated for the next tax year and reductions in dividends could generate refunds of overpaid tax that did not need to be paid. That happened to the wife in this case and information was then withheld to enable her to submit her next return early in the tax year and so get the position rectified. HMRC pays interest on refunds in the next tax year but most of us would prefer to get our money back promptly.

Conflict of interest

The next problem with dividends is that the loan account balance can change ?significantly between the date of the Form E and the date of the company valuation and that can affect the valuation if the value of net assets exceeds the company value based on a multiple of adjusted earnings. Dividends reduce the amount of shareholders' funds (net assets).

A further complication OMBs produce is a conflict of interest for the personal and company tax agents in their duty to the wife as she often has no direct contact with them and her interests may be ignored.

A trend on the horizon is the implication of family mediation to try and take cases away from the courts. As a commercial mediator I understand the pressure to resolve financial disputes, and solicitors may have to bring in more expertise for certain meetings to help progress matters or risk problems if they misinterpret financial information.

Getting court permission to formally instruct experts may also become harder under the 2013 reforms, so use of forensic accounting experts as advisers could ?become essential in the more complex cases that tend to arise if there are business assets involved. It is one thing to report that an investment portfolio has a value of £1m based on stock exchange prices, but it is more difficult to be certain that a company has any particular value and resources to fund a share purchase.