Richard Kershaw and Nicholas Yates KC discuss private equity on divorce in FT Adviser
Richard and Nicholas Yates’ (1 Hare Court) article was published in the FT Adviser, 1 July 2024, and can be seen here.
Richard Kershaw, Partner in our Family & Relationships department, discusses the complex treatment of private equity interests, particularly carried interest on divorce.
The article examines how carried interest, a performance-related bonus paid to private equity fund managers, is typically taxed as capital gains, but in divorce proceedings, it is often treated as income. This distinction is crucial, as it affects whether and how such assets are shared between spouses during financial settlements.
Richard and Nicholas highlight that while co-investments made during the marriage are generally considered matrimonial property and subject to equal division, carried interest earned after separation is usually excluded from sharing. This is because it is seen as post-marital income rather than a return on joint investment. However, the line between these categories is often blurred, especially when funds were established during the marriage but pay out later. The authors reference key cases, including B v B [2013] and ES v SS [2023], where courts grappled with these distinctions and the timing of asset realisation.
The article underscores the challenges in valuing and dividing private equity interests, particularly when they are illiquid or contingent on future performance. Richard and Nicholas stress the importance of expert legal and financial advice in such cases, as well as the need for careful structuring of settlements to reflect both fairness and practicality. As private equity wealth becomes more common in high-net-worth divorces, understanding how carried interest is treated will remain a critical issue for family lawyers and their clients.
Read the full article on the FT Adviser website [subscription required].