Divorce and Share Options
How Are Long-Term Incentive Plans and Share Options Handled in a Divorce?
Divorce often involves dividing not just the family home and savings, but also more complex financial assets. Among these, long-term incentive plans (LTIPs) and share options—common components of compensation in many industries—can raise unique challenges in English and Welsh divorce proceedings. These assets can represent a significant portion of a high-earning spouse’s remuneration and future financial security, so it’s crucial to understand how they are treated in family law.
In this article, we’ll explore how LTIPs and share options are considered by the courts, how they are valued, and what strategies exist for their division during divorce.
What Are Long-Term Incentive Plans (LTIPs) and Share Options?
LTIPs are performance-based awards given to employees, often in the form of shares or cash, which vest over a number of years if certain conditions—such as company performance or continued employment—are met. They are designed to incentivise employees to contribute to long-term growth.
Share options give employees the right to buy company shares at a set price, often after a vesting period. They can be highly valuable if the share price appreciates, but their value can also fluctuate significantly.
Are LTIPs and Share Options Considered Marital Assets?
In England and Wales, the family courts consider all assets acquired during the marriage, including employment-related benefits such as LTIPs and share options, to be part of the matrimonial pot.
However, their treatment is nuanced. The court distinguishes between:
Assets earned during the marriage (likely to be considered matrimonial and thus shareable).
Assets earned after separation or that relate to future performance (may be treated as non-matrimonial and less likely to be shared).
This distinction can be particularly complex with LTIPs and share options, which often overlap periods both during and after the marriage.
These type of assets may also be lost, for example if the value of the underlying company drops significantly, or the recipient of the LTIPs or share options leaves that particular employment. In that situation, the value of those assets is frequently forfeited. They are often illiquid and/or uncertain.
How Are LTIPs and Share Options Valued in Divorce?
Valuing these assets is challenging because:
Awards may not have vested yet, making their value uncertain.
Some awards depend on future performance conditions, adding further complexity.
Tax implications may affect the net value a spouse would actually receive.
Courts often rely on expert financial reports, sometimes from forensic accountants, to determine a fair valuation. Valuation methods may involve discounting the potential award to reflect vesting conditions, risk of forfeiture, and performance hurdles.
How Does the Court Decide How to Divide LTIPs and Share Options?
Courts typically apply a time-based apportionment to separate the portion that was “earned” during the marriage from the portion related to future efforts or post-separation performance.
For example, if an LTIP award has a three-year vesting period and the couple separated halfway through that period, the court may consider 50% of the award to be matrimonial and available for sharing, while the remaining 50% may be treated as non-matrimonial.
What Are the Practical Options for Division?
Once the court determines how much of the LTIP or share option is shareable, several practical arrangements can be considered:
Deferred sharing: The owning spouse pays a share of the proceeds to the other party once the award vests and is realised.
Offsetting: The other spouse receives a larger share of other assets (like property or cash) instead of a direct share of the LTIP or options.
Trust arrangements: Less common, but sometimes used for complex awards, allowing the proceeds to be distributed fairly once the value is realised.
Each option has pros and cons. Deferred sharing requires ongoing cooperation, while offsetting can be challenging if the value of the award is uncertain.
How Are Tax Considerations Addressed?
Taxation is a key factor in dividing LTIPs and share options. When the award vests, income tax and National Insurance contributions may be due. Additionally, any subsequent sale of shares may trigger capital gains tax (CGT).
It’s essential to account for these liabilities to avoid one spouse bearing an unfair tax burden. Legal and financial advisers can help structure settlements to reflect the net value of the awards rather than the gross value.
Why You Need Specialist Advice
Given the complexity of these assets, divorcing spouses should seek advice from specialist family lawyers experienced in high-net-worth financial cases. At Ribet Myles, we work closely with financial experts to ensure that LTIPs and share options are valued accurately, divided fairly, and that tax implications are fully considered.
We understand that these assets can represent a significant part of your financial future—and that a fair outcome requires careful planning and negotiation.
Conclusion
LTIPs and share options are increasingly common components of modern compensation packages, and their treatment in divorce requires a careful, tailored approach. Understanding how courts view these assets, how they’re valued, and how they can be divided is essential for achieving a fair financial settlement.
If you or your spouse have LTIPs or share options and you’re considering or going through a divorce, contact Ribet Myles today on 020 7242 6000. Our expert team can guide you through this complex area and help secure your financial future.