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20 July 2020

Reaching a financial settlement during uncertain times

The impact of COVID-19 is widespread and, for those going through a divorce, it has added further uncertainty to what is often already a stressful and upsetting time.

However, for many people it is simply impractical to pause negotiations until it becomes clearer what the future holds. There may be personal, business or tax reasons as to why reaching an early settlement is favourable. Furthermore, these circumstances are not entirely unfamiliar to us, having lived through a period of economic uncertainty since the EU referendum in 2016.

Valuing your assets when the market is fluctuating

As part of the process of negotiating a financial settlement both spouses must provide detailed information about their finances. However, it can be difficult to obtain accurate valuations of properties, businesses, investments and pensions when the market is fluctuating, or to estimate with certainty what your income is likely to be over the next 12 months.

It is common practice to appoint an expert to value businesses in which either person has an interest. An expert can also be appointed to value any other assets for which the parties cannot agree a value between themselves.

While it is not possible to predict with certainty how a business will perform over the coming months or years, the business valuation process is flexible and in many cases it is still helpful to obtain a valuation. Experts may take into account additional information to enable them to better understand the company, its clients, its past performance and predicted profitability. For example, if the business has been forced to make redundancies, or if its staff remain on furlough, may indicate whether the business’ performance is likely to return to ‘normal’ in the short to medium-term. Experts can also be asked to provide a range of valuations to cover various scenarios or assumptions.

Sharing the risks

It is common for ‘higher risk’ assets to be shared between the parties, or to compensate one party for taking on a larger share of that risk. For example, a settlement which provides one person with quoted shares and the other person with cash of the same value may not be deemed ‘fair’ because the value of the shares is more volatile. However, this may be a risk one party is prepared to take.

Similarly, if it is not clear what level of income one or both parties are likely to receive over the coming months or years (particularly if they are self-employed or receive bonuses which are dependent upon company performance) this can be taken into account. For example, flexibility can be built in by providing for one party to pay the other a fixed amount of maintenance, with an additional ‘top-up’ element which is calculated as a percentage of the payer’s bonus. Maintenance orders are also open to variation if there has been a significant change in circumstances.

Whether a couple should agree a financial settlement in the current circumstances is a decision which is entirely fact-specific. Although the current situation is unprecedented, financial uncertainty has long been an obstacle to which separating couples and their solicitors have had to adapt.

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