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Tax changes in the budget have prompted many to consider gifting assets to the next generation now – but are those assets at risk if the recipient divorces?
My colleague Iwan Williams has written about how business owners and the rural community have been left reeling by the changes to Inheritance Tax reliefs made in the budget, find out more here.
Both Business Property Relief (BPR) and Agricultural Property Relief (APR) will be restricted from 6 April 2026, limiting the ways in which family farms, businesses and estates can be passed to the next generation intact and without incurring a significant Inheritance Tax bill – when there is often limited available cash to pay this. The new tax rules could result in many farming and business owning families paying significantly more Inheritance Tax than they had expected or planned for and many are considering whether there are steps they can take now to mitigate this.
Gifting assets
One option that the changes have prompted many individuals to consider is transferring assets to the next generation now, rather than leaving them to pass on death. If the donor survives for seven years after gifting assets, Inheritance Tax may be avoided on those assets. We have already been contacted by a number of clients wanting to discuss transferring assets to their children or grandchildren now.
Transferring assets now may well reduce the future Inheritance Tax bill – however, there are other factors that should be considered.
Firstly, it is important that those gifting assets ensure that they will still be able to manage comfortably throughout their own retirement.
For farm or business owners, transferring ownership of assets can result in a reduction in control over the business or farm. Those considering making gifts now will need to think carefully about the practicalities of this.
The wider tax and administrative consequences of a transfer, particularly into a trust, would also need to be considered.
Family law considerations are also very important and we are receiving increasing enquiries about the implications of transferring assets to children and wider family members in the event of any future relationship breakdown. It is all very well to pass assets down the generations in an effort to reduce the future Inheritance Tax bill, but could a significant proportion of those assets then be lost to a financial claim by a spouse if the recipient later divorces?
Implications of a divorce
There is no set formula for working out who gets what on a divorce – the division of assets should be fair and appropriate in all the circumstances and will depend on a variety of factors. It is a discretionary area of law, which can lead to significant disagreement about what should happen.
Whether a successful claim could be made against assets received by gift from family will depend on the situation. However, the bottom line is that they will not be ignored or automatically ringfenced and they could well be susceptible to claims.
Any assets owned by either spouse at the time of a divorce will be taken into account as a resource that is available to that individual. It is possible that their spouse might receive a share of the gifted assets if their needs required this or if the assets have been used for the benefit of the family – for example funding their home or used to pay for holidays and other costs. Even if the recipient of the gift were to retain the gifted assets in full on a divorce, they might receive a smaller share of the couple’s other assets as a result, on the basis that the gifted assets are available to meet their own needs.
Keeping the gifted assets separate from their spouse throughout the marriage can help – where they have not been used for the family or intermingled with joint resources, they may be regarded as “non-matrimonial” and not automatically shared on a divorce. However, it is not always practical or possible to keep those assets entirely separate, particularly where the asset is a property or part of a farm. In addition, even where those assets have been kept entirely separate from the recipient’s spouse, claims can still be made against non-matrimonial assets on a divorce where the family’s needs require this.
Assets transferred into a trust are also not ignored on a beneficiary’s divorce – they can be taken into account, can impact on the division of the couple’s other assets and sometimes financial claims can even be made directly against the trust assets. This is a complex topic and can result in complicated court litigation involving trustees and even other beneficiaries as well as the couple.
Protecting assets from divorce
One of the most effective ways of protecting gifted assets in the event of a future divorce is likely to be by ensuring that everyone is clear now about their intentions if the couple were ever to separate and for those intentions to be recorded. This can be done in a nuptial agreement which sets out a framework as to what the couple intend to happen to their assets if they were ever to divorce and/or “ringfence” particular assets such as those they have received by gift or inheritance so that claims are not made against them. Such an agreement can be entered into before or at any point during a marriage – before marriage it is known as a “pre-nuptial agreement” and once a couple are married it is a “post-nuptial agreement”.
Nuptial agreements have become increasingly common over the last fifteen years or so. They are now frequently entered into by individuals with more modest wealth (or expectations of modest future wealth) as well as those with very significant resources. Many regard them as a normal part of wealth planning, much like entering into a will.
How binding is a nuptial agreement?
Nuptial agreements were tested in a 2010 Supreme Court case. The Supreme Court decided that “the court should give effect to a nuptial agreement that is freely entered into by each party with a full appreciation of its implications unless in the circumstances prevailing it would not be fair to hold the parties to the agreement“.
Whilst the final decision about the division of finances upon divorce ultimately rests with the family courts, and whilst it is possible that later changes in circumstances could potentially lead to the terms of an agreement becoming unfair, anyone entering into a nuptial agreement should expect to be held to its terms. Flexibility or reviews can be included in the agreement to allow for any major life changes.
Even in cases where a nuptial agreement has been challenged and the family court has decided that there is a reason why the parties should not be held strictly to its terms, it is clear that these agreements can make a real difference to the way the assets are treated and divided.
The terms of a nuptial agreement will not be upheld if it would be unfair to hold the parties to it. Generally leaving one spouse very comfortably off and the other with nothing is unlikely to be fair. A common misconception we hear is that nuptial agreements are about saying the other party “won’t get a penny” on a divorce, which would understandably cause concern about upsetting them – that is very rarely the case and could indeed render the agreement unfair and thus unenforceable. A nuptial agreement can be of benefit to both spouses, giving them both clarity and the party with lower-value assets the comfort of knowing that they and any children will be suitably provided for on a divorce.
There should also be some sharing of financial information so that the couple both understand the context in which they are agreeing terms and they should each have independent legal advice.
It is usual to make it clear within the agreement that the couple are committed to their marriage and hope it will never break down – but that they want clarity and greater certainty in the event that this does unfortunately occur. Some view the process of entering into a nuptial agreement as similar to taking out an insurance policy. If the couple do later separate, a nuptial agreement can significantly reduce the acrimony, emotional and financial toll at a very difficult time later down the line.
For an unmarried couple, whilst the legal position and potential claims are very different to a married couple, it can be sensible to enter into a Cohabitation Agreement providing clarity about the couple’s financial arrangements, their rights and responsibilities in relation to any property and what they would intend to happen if they separate. This can avoid future disagreement about whether, for example, an unmarried partner has acquired a beneficial interest in a property that may form part of a farm or have been gifted by their partner’s parents.
Recording intentions clearly now can avoid significant disputes, upset and legal costs if a relationship breaks down in the future.
Our Family team work closely with the firm’s Tax, Trusts and Succession team, Corporate and Commercial teams, Agriculture team and others to assist their clients in planning for the future.
Please do contact Felicity Chapman, partner in the Family Team at Michelmores if you would like to discuss any of these issues.
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