Wallace v Wallace: Latent Dividend-Tax on Private-Company Wealth as a “Special Circumstance” – A Qualified Departure from Equal Sharing

1. Introduction

The Outer House decision of Lady Carmichael in Natalie Coia Hamilton or Wallace v Anthony Paul Wallace ([2025] CSOH 73) addresses the perennial Scottish family-law tension between the principle of equal sharing of matrimonial property (Family Law (Scotland) Act 1985, s 10(1)) and the practical cost of unlocking value tied up in a spouse’s private company.

Both parties are solicitors. Their largest matrimonial asset was the defender’s 100% shareholding in Building Law Practice Holdings Ltd. (“BLPH”), valued at roughly £3.64 million. The pursuer argued for a straight 50/50 division; the defender claimed an unequal split because:

Dividend extraction to pay a capital sum would trigger sizeable income-tax liabilities;
He had sustained “economic disadvantage” through supporting the pursuer’s career;
A post-relevant-date bad debt had reduced company value.

The Court was therefore required to decide:

How latent tax on future dividends should be treated under s 10;
Whether the defender’s claimed disadvantages justified unequal sharing;
What capital sum, if any, was “reasonable” in terms of s 8(2).

2. Summary of the Judgment

Lady Carmichael:

Granted decree of divorce and made agreed residence orders.
Fixed net matrimonial property at £9,253,285.
Accepted a £15,096 downward adjustment (75 % of a now-irrecoverable company debt) as a s 10(1) “special circumstance”.
Rejected most of the defender’s claimed economic disadvantage.
Found the possibility of tax on future dividends a special circumstance but gave it limited weight because:
- The defender had voluntarily used £736k of easily-realisable assets to buy his new home tax-efficiently, thereby creating the present funding problem.
- Tax arises only if and when dividends are actually paid; its magnitude is partly within the defender’s control.
Ordered the defender to pay a capital sum of £1.2 million within 28 days, and to transfer his interest in the former matrimonial home to the pursuer.

3. Detailed Analysis

3.1 Precedents Cited & Their Influence

McConnell v McConnell (No 2) 1997 Fam LR 109 – Recognised difficulty in realising company assets may constitute a “special circumstance”. Lady Carmichael followed the dictum that whether and to what extent to depart from equality is a question of “circumstances and degree”.
Sweeney v Sweeney (No 2) 2006 SC 82 – Held that contingent tax liabilities may be brought into account under s 10 or s 8. The Inner House, however, treated equal division as starting point and merely allowed a modest deduction plus staged payment. This case supplied the template for limited adjustment plus instalment reasoning (though Wallace ultimately ordered lump-sum payment).
W v W 2013 Fam LR 85 – Drew distinction between (i) latent CGT on shares (deductible) and (ii) income-tax on dividends used to pay capital sum (normally not a special circumstance). Lady Carmichael cited and adopted that distinction.
Foster v Foster 2024 SC 99 – Emphasised value to a spouse of retaining full control of trading company; here BLPH was non-trading, so that benefit was absent, supporting only partial deduction for tax.

3.2 Court’s Legal Reasoning

Equal Sharing Baseline Section 10(1) FL(S)A 1985 presumes equal division of net matrimonial property. Half share = £4.626 m. After crediting the pursuer with the defender’s half share of the home, preliminary balancing payment calculated at £1.478 m.
Special Circumstances Test The defender’s arguments were analysed one by one:

a) Economic Disadvantage/Advantage (s 9(1)(b))
• Emotional “counselling” and management of finances ≠ economic disadvantage.
• Pursuer’s part-time working to raise children accepted as genuine disadvantage; this favoured equal sharing, not deviation.

b) Post-Relevant-Date Bad Debt
• Qualifies as a “special circumstance”; deduction of £15,096 (25 % of £60k).

c) Latent Tax on BLPH Dividend
• Liability hypothetical and partly self-created (defender spent liquid assets on house, not paying pursuer).
• Nevertheless disparity in nature of assets (liquid v. tax-encumbered) can count as special circumstance (Sweeney).
• Court balances six factors (¶ 156-164) and gives limited credit: capital sum reduced by c. £263k (from £1.463m to £1.2m).
Resources & Ability to Pay (s 8(2)(b))
• Evidence did not establish impossibility of mortgage funding.
• Defender’s director-loan/interest option unsustainable long-term.
• BLPH capable of declaring dividend; tax is simply a cost of realising value.
• 28-day payment timetable therefore reasonable.

3.3 Impact of the Decision

Wallace clarifies the Scottish approach to latent income-tax costs when matrimonial wealth is locked in a private non-trading holding company:

Tax on future dividends can be a s 10 “special circumstance”, but will rarely justify shifting the whole burden to the non-shareholding spouse.
The court will interrogate the shareholder’s post-separation conduct: self-inflicted liquidity shortages attract less sympathy.
Where tax is ultimately only incurred if the shareholder chooses to extract funds, allowance will be modest and fact-sensitive.
The decision signals scepticism towards “fund-my-tax” arguments when the defending spouse still holds sizeable untaxed reserves and has alternative funding routes.

4. Complex Concepts Simplified

Relevant Date: The statutory snapshot (s 10(3))—here 21 June 2024—on which assets/liabilities are valued for division.
Director’s Loan Account (“DLA”): A running account between a company and its director/shareholder. Borrowings outstanding 9 months after year-end trigger a 33.75 % Corporation-Tax charge (CTA 2010, s 455). Interest below HMRC’s official rate becomes a taxable “benefit in kind”.
Dividend Tax Bands (post-2024): • £0–1k allowance at 0 %; • Basic rate 8.75 %; • Higher 33.75 %; • Additional 39.35 %. In Scotland, dividend tax uses UK-wide bands but interacts with Scottish rate thresholds for other income.
Latent / Contingent Tax: Tax that might be payable in the future if, and only if, the owner realises or extracts the asset (e.g., CGT on share sale or income tax on dividends). Courts may recognise it but will discount its speculative element.
Section 110 Insolvency Act 1986 Reconstruction: Tax-efficient demerger allowing company assets to be split into new companies. Defender offered but pursuer declined; court not obliged to force such complex arrangements.

5. Conclusion

Wallace reinforces the primacy of equal sharing while acknowledging that the shape of a spouse’s wealth can make absolute equality impracticable. Latent dividend tax on a non-trading holding company is a legitimate “special circumstance” but:

The cost of unlocking company wealth will be shared only to the extent that fairness objectively demands—self-created liquidity problems and the other spouse’s economic sacrifice weigh heavily against a wholesale deduction.

Family lawyers should therefore:

Gather detailed, evidenced calculations of future tax exposure;
Demonstrate why alternative funding (mortgage, director’s loan, staged payments) is truly unviable;
Expect only partial relief where the tax arises by choice rather than compulsion.

Practically, the decision may encourage:

Earlier, forensic scrutiny of spouses’ post-separation asset-reshuffling;
Negotiated solutions such as deferred instalments or in-specie transfers (e.g., a minority shareholding) to spread tax cost;
Increased use of s 110 reconstructions—but only with both parties’ informed consent.

Wallace therefore marks an important, balanced precedent: latent tax can matter, yet justice to both spouses—especially the economically disadvantaged caregiver—demands that it not eclipse the fundamental scheme of equal sharing in Scottish divorce law.