With the possibility of increased Capital Taxes following the pandemic, many families are currently considering tax planning, in particular the lifetime transfer of assets through the generations to mitigate against the risk of increased wealth taxes on their assets.
This year’s budgets could well see substantial increases in taxes as the Chancellor seeks to offset the costs of the pandemic.
The dilemma that faces the older generation in making such asset transfers, is the risk that their children or grandchildren may be divorced once the family asset transfer has taken place. That asset then becomes vulnerable to division or sale by a divorce court.
The benefits of pre and post-nups for tax planning
Help is at hand with the increased recognition of Pre and Post Nuptial Agreements over recent years. If for example, parents wish to transfer a particular asset to their child such as a land holding, they could offer to transfer it on the condition that their child and his or her spouse enter into a pre or post nuptial agreement prior to the transfer.
The Agreement would confirm that in the event of a divorce, it is not intended that this family asset should be divided or sold on divorce and should remain the asset of the child to whom it was transferred. The degree of protection offered by such an agreement is now high, provided all the correct legal formalities are observed and it is vital to take detailed legal advice on this.
There are limitations in situations where there are few other assets available to the couple signing the agreement. The divorce court has to be satisfied that the needs of the couple can be reasonably met without recourse to the gifted asset. Provided there are sufficient other funds in the marriage it is highly likely that a court would uphold the agreement in the event of a divorce.
In our experience the younger generation are often willing to sign pre or post nuptial agreements to ensure that a gift of assets is made – at that point a possible divorce is not usually even in contemplation and they are therefore more likely to be unconcerned by signing such an agreement.
In the family team we have considerable experience in preparation of these agreements and their continued popularity is set to increase with more emphasis on tax planning ahead.
This article is part of a series on the various benefits of pre and post-nuptial agreements:
- How can I give my child money without their spouse having a claim?
- Parents, pre-nups and paying for house deposits
- Second Marriage & Adult Children – how to address financial concerns
- Inheritance & Money – what are the consequences of ‘mingling’ inherited assets?
- Farming pre and post-nups – benefits for succession planning