The Budget & Inheritance Tax: protecting lifetime gifts from divorce risk

After a long marriage, or a short marriage with children, English divorce law generally starts with the principle of the 50:50 sharing of “marital assets” (i.e. assets generated during the marriage plus any period of pre-marriage co-habitation). This "sharing principle" usually applies to the equity in matrimonial homes (whatever the source of the equity in those homes), savings, investments, pensions and the value of any business built up during the marriage.

Inherited assets, and those acquired before the relationship began, are generally termed “non-marital” and are not subject to the sharing principle. However, non-marital assets are not fully protected. They can be “invaded” if the court deems it appropriate to meet the needs of the financially weaker party. This might initially sound reassuring, but the family court tends towards a generous analysis of what constitutes needs.

For example, if a divorcing couple has net marital assets of £1 million and non-marital assets of £3 million, the financially weaker spouse might reasonably – and successfully – argue that they need a capital settlement of £2 million – effectively sharing the assets – despite the substantially non-marital origin.

In bigger money cases, the generous analysis of needs can appear somewhat elastic. For example, the 2024 Court of Appeal decision in the case of Standish was in relation to assets of around £130 million, most of which were the husband’s non-marital assets. The Court of Appeal hinted that “the wife’s needs could be met by a sum in the region of £25 million“.

Mitigating divorce risk

The family court’s approach means that lifetime gifts can be vulnerable to needs-based claims on divorce. However, the risk can be mitigated with careful planning.

Many readers will already be aware of the valuable protection available through pre-nuptial agreements. It is less well known that the same protections are available to married couples who choose to enter into a post-nuptial agreement.

In essence, a nuptial agreement – whether entered before or after the marriage – allows the parties to agree either the principles or specifics of how they wish to address financial claims in the event of divorce. Nuptial agreements were legitimised in English law by the Supreme Court’s 2010 decision in the case of Radmacher. This ruling held 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 their agreement“.

Since Radmacher, there has been a marked trend to uphold nuptial agreements (if deemed fair in the prevailing circumstances). On that basis, a well-drafted nuptial agreement can be very protective. It’s important to remember that both parties must take legal advice – meaning that costs are incurred on both sides and there is usually an element of negotiation in the process. Private client advisers have long encouraged clients to make and regularly update their wills as a key element of good financial housekeeping. Increasingly, they are also recommending nuptial agreements, most particularly when significant lifetime gifts are contemplated.

Nuptial agreements are very personal and require a diplomatic and sensitive approach. Legal and financial advisers can both help to support and facilitate informed discussions with family members. The family law team at Boodle Hatfield has deep experience of advising on constructive, protective and fair nuptial agreements. Financial advisers at Cazenove Capital have expertise on the financial implications of lifetime gifting as part of a financial planning strategy.

To explore nuptial agreements in practice, the following case studies illustrate how married couples could pass either a family home or a family business to their children as an effective means or reducing the overall IHT liabilities. Nuptial agreements can be designed to fit the specific circumstances of a couple and their assets to provide a substantial or comprehensive safeguard against divorce risk.

Scenario 1 – transferring a family home

An older couple live in a cherished and attractive home that is larger than they now require. They have other properties and a substantial investment portfolio including pensions and PEPs/ISAs. Now in their early 70s, they are exploring ways of reducing the proportion of their estate that will be subject to 40% IHT. They are considering passing the family home now to their married daughter, who currently lives in a flat that she co-owns with her husband. They like and trust the husband, but don’t want him to have a claim on the home if the younger couple should ever get divorced.

The older couple could explain to their daughter and son-in-law that they are considering a lifetime gift to mitigate IHT. They might stipulate that they would only make the gift if the younger couple first enter into a post-nuptial agreement – ringfencing the value of the home by recording that the value of the gifted home is “non-marital” and excluded from divorce claims.

Scenario 2 – transferring shares in a family business

A couple in their mid-60s own 100% of the shares in a successful trading business. Following the recent Budget, the business is expected to be subject broadly 20% IHT on any value in excess of £1 million for deaths after April 2026, and the rest of the estate is subject to the existing 40% IHT charge (subject to any reliefs or exemptions as may apply). The couple is interested in gifting shares in the business to their three children to reduce exposure to IHT, but they don’t want the family business to be disrupted by a future divorce. Two of the three children are already married.

After taking appropriate tax advice, the couple invite the next generation to commit to entering into nuptial agreements to protect the capital value in and income deriving from the business on divorce. The family charter is amended to include a nuptial agreement policy to apply to all future shareholders.

Summary

Estates are more exposed to IHT than ever previously this century. Pensions will soon be liable to IHT and the generous exemptions which used to apply are being radically pared back. In the circumstances, lifetime gifts by way of Potentially Exempt Transfers can be an effective solution to mitigate IHT. Anybody considering making a substantive lifetime transfer to the next generation should give careful consideration to the protections that can be secured under a well-drafted nuptial agreement.

This piece was jointly authored in March 2025 by William Rollin and Katie Male, alongside Cazenove’s Katherine Parkes, Wealth Planning Director and Rachel Sutton, Portfolio Manager.