The significant changes to inheritance tax (IHT) announced in the Autumn Budget 2024 mean that while headline IHT rates remain unchanged, the scope of reliefs will reduce, increasing potential tax exposure.
Outright lifetime gifts – potentially exempt transfers (PETs) – continue to offer an effective IHT mitigation strategy, with incremental tax relief if the donor survives three years from date of transfer and full relief provided the donor survives seven years from the date of transfer. This article focuses on a critical consideration in such gifting and how legal mechanisms like nuptial agreements can help safeguard gifted assets.
Divorce risk
One of the principal concerns around lifetime gifting is the possibility that gifted assets may be lost upon a future divorce if the recipient child separates from their spouse.
In family law, a couple's wealth is typically assessed in terms of ‘marital’ and ‘non-marital’ assets. While gifts and inheritances are usually classified as non-marital, they are still at risk from claims. The court may allow a financially weaker spouse to access non-marital assets to meet their ‘needs’—which are generously interpreted—especially where the couple has enjoyed a high standard of living.
In family law, a couple's wealth is typically assessed in terms of ‘marital’ and ‘non-marital’ assets.
For example, if the couple's marital assets total £1 million and the child’s non-marital assets stand at £3 million, a court might award a spouse £2 million, effectively deriving that sum from the non-marital asset—a deeply concerning prospect for parents who gifted the non-marital asset. Given the court's generous interpretation of 'needs', case law suggests that the bigger the non-marital asset base, the bigger the needs claim that may be advanced by the spouse.
Mitigating divorce risk
To counter this threat, we often recommend nuptial agreements—either pre-nuptial (before marriage) or post-nuptial (after marriage). In formulating a nuptial agreement, the couple agree in advance on how assets (especially gifted or inherited wealth) would be treated in the event of divorce.
Since the landmark Radmacher case in 2010, courts generally uphold nuptial agreements, provided they are entered into freely, with full understanding, and the outcome is fair. They can thus offer powerful protection for family gifts—especially when the gift forms part of a broader estate planning strategy.
Parents making substantial gifts should consider making the signing of a nuptial agreement a pre-condition before effecting the transfer. Whilst this is a conversation to handle sensitively, the precaution reflects prudent planning rather than a lack of trust, and it can ultimately shield family wealth from unintended redistribution.
Planning
When contemplating PETs or other potentially chargeable transfers to IHT, professional tax advice is critical in determining which assets to give and to consider timings. Once an asset is identified, parents (or their solicitor) should explain the rationale of the gift to child and all parties should understand the tax implications — along with the importance of securing a nuptial agreement.
The terms of such agreements should be tailored based on: the nature and value of the gift, the financial position of child and spouse, as well as any involvement of the business (if relevant).
For instance, in cases involving shares in a family business, the nuptial agreement could include protective clauses such as:
- Preventing transfer of shares to spouse
- Restricting spouse’s access to dividends or business income
- Requiring spouse to resign any directorship or employment
- Ensuring spouse vacates business premises and surrenders business property
- Maintaining business confidentiality and goodwill post-divorce
Final thoughts
The 2024 Budget signalled a tighter future IHT landscape, especially for families with trading businesses or large estates. While outright giving may remain viable for reducing IHT, the wider succession planning and matrimonial implications should be carefully managed. Nuptial agreements can serve as a strategic tool to preserve wealth within the family—ensuring that gifts intended for the next generation are not inadvertently redirected by family breakdown.
With timely legal and tax advice, families can implement gifting plans that are both tax-efficient and resilient in the face of personal risk, such as divorce.
About Boodle Hatfield
Boodle Hatfield is a London law firm which has partnered with individuals, families, property owners and businesses for over three centuries. Find out more: www.boodlehatfield.com
All views expressed are those of the author and are presented for information purposes only. The information provided in this article is of a general nature and is not a substitute for specific advice about your own circumstances. You are recommended to obtain specific advice from a qualified professional before you take any action or refrain from any action.
