Nuptial agreements (prenuptial entered into prior to the marriage and post nuptial during the marriage) have increasingly become an effective tool to formalise arrangements and protect assets upon divorce. In today’s financial landscape, personal finances have become more complex than ever. With economic uncertainties and changes in tax policies outlined in the recent budget, nuptial agreements are now, more than ever, a valuable financial decision.
The result of the budget is that many people will pay much more tax. Consequently, those facing concerns regarding their future inheritance tax and CGT liabilities will, quite rightly, seek guidance from their advisers as to how to reduce that liability moving forwards. This will inevitably include the transfer of assets to maximise the available exemptions and reliefs - particularly between married couples and inter-generational wealth planning.
In the UK alone, experts predict £5.5 trillion of assets to be passed down to the next generations between now and 2050 in what has been called the ‘greatest wealth transfer in history’. Whilst this may make perfect sense from a tax liability point of view it raises concerns for those who wish to keep wealth within the family for the benefit of future generations such as owners of family companies, landed estates and dynastic wealth - in particular the dilution of assets upon a divorce.
Any provision put in place to limit taxes upon death are often counter productive for those who subsequently divorce. Upon a divorce, without any agreement in place, the starting point of any financial settlement will based on the entirety of the assets owned by the couple which can, in the worst circumstances, result in the sale of family companies, the transfer of shares or the liquidation of long held family wealth including those held in Trust.
The most effective way of protecting assets from a divorce is to enter into a nuptial agreement. Specifically, following the budget, in anticipation of a gift of assets made as part of a larger tax planning or wealth protection exercise.
Provided a nuptial agreement is entered properly and with certain criteria being met they will be upheld by courts and ensure families are:-
- Protecting Assets in a Volatile Economy
One of the main purposes of a nuptial agreement is to protect individual assets. With market fluctuations and potential changes in tax policies following the budget, safeguarding your personal or family wealth becomes crucial. A nuptial agreement allows both parties to clearly define ownership of assets either brought into the marriage ensuring these assets remain protected in the case of a divorce.
- Mitigating the Risks of Business Ownership
If one spouse owns a business or is self-employed, a nuptial agreement is particularly valuable. Small businesses and entrepreneurial ventures are sensitive to economic shifts, which can affect valuation and growth. A nuptial agreement can outline how business assets will be handled in a divorce, often ringfencing shares from an overall settlement thereby protecting the business and preventing disputes that could be damaging to its financial health.
- Safeguarding Future Inheritances and Gifts
Following the proposed changes in the budget wealth planning which can affect long-term financial planning. A nuptial agreement can be used to protect historic or future gifts and inheritances, ensuring they remain individual property, especially if they are intended for specific family members or purposes.
- Preserving Financial Autonomy for Both Partners
Maintaining some financial independence within a marriage is often a priority, especially for those entering second marriages or for partners with significant assets. A nuptial agreement can establish financial boundaries and clarify which assets remain separate, which allows both individuals to retain control over their own finances, investments, and assets. This autonomy is particularly important in a budget climate which could impact future income or savings.
- Planning for Children from Previous Relationships
If either partner has children from a previous relationship, a nuptial agreement can ensure that assets meant for those children remain protected. The budget’s impact on inheritance tax and estate planning may be challenging, but a nuptial agreement allows couples to specifically address their intentions for their children from prior relationships, securing their financial futures regardless of what happens in the marriage.
- Providing a Framework for an Amicable Divorce
Whilst no one enters a marriage expecting a divorce, having a nuptial agreement can make a divorce more straightforward if it does happen. By establishing a clear financial framework in advance, couples can reduce the stress, costs, and emotional strain of legal disputes.
Whether you’re protecting your business or ensuring the preservation of family wealth, a nuptial agreement can offer both security and peace of mind. In the context of the new budget, it is worth considering how a nuptial agreement might align with your long-term financial goals and provide stability in an unpredictable world. Please get in touch with our family team at Roythornes for support.