Mitigating IHT & Divorce Risks: Strategic Planning For Families Post Budget

Boodle Hatfield's William Rollin (Partner – Family and Divorce) and Laura Cullinane (Senior Associate – Tax and Trusts) reflect on the IHT implications of last Autumn's Budget and explore the planning opportunity to mitigate IHT and divorce risk in the context of a family business

Significant changes to personal taxation were announced in the Autumn Budget 2024. These included inheritance tax (IHT) restrictions on agricultural and business property relief (APR/BPR) and announcements of changes to the IHT treatment of pensions.

Headline IHT rates have not changed but APR/BPR will reduce significantly from 6 April 2026. From 6 April 2027, unspent pension funds and death benefits will also be subject to IHT. The detail of the proposed changes is subject to separate consultations (the consultation in respect of BPR/APR having been published on 27 February 2025) but those consultations fall outside the scope of this article. In broad summary, the direction of travel is clear - the intended tax changes will mean more assets falling outside the existing IHT reliefs and the overall IHT burden shall be higher.

Some readers will be aware that every individual has an IHT nil rate band of £325,000 - and there are various reliefs/exemptions such as the spouse exemption and main residence nil rate band. Beyond the nil rate bands and exemptions/reliefs; anything left to the next generation on death will incur IHT at up to 40%.

However, outright lifetime gifts (Potentially Exempt Transfers or PETs) made more than 7 years before death are not assessed to IHT. If the donor fails to survive seven years from the date of the gift, the PET becomes chargeable to IHT so the value of the transfer is included in the donor's estate (reduced by taper relief if the donor survived more than three years from the date of the gift). While the Budget extended the scope of IHT, it did not disrupt the ability to make PETs.

It should also be noted that families can still consider opportunities to put BPR/APR property into trust (and take it out of trust) before April 2026 in addition to or instead of lifetime gifts. Bespoke advice should be obtained to maximise protections. Our view is that passing wealth to future generations early remains potentially very effective for IHT planning purposes.

IHT – A Planning Opportunity?

In light of the changes announced in the Budget and potential impact on family wealth, we focus in this article on a notional older couple (Parents) whose assets exceed their needs. Their asset base includes the family home, an investment property, ISAs, pensions and the entire shareholding in the family trading business. Professional advice confirms that their assets (and income) exceed lifetime needs. However, subject to the usual exemptions and reliefs summarised in this article, any legacy left to the next generation risks incurring IHT at up to 40%. Parents are therefore considering mitigating IHT by making a PET to the next generation (Child).

Whilst it is tempting to delay making plans for future – the sooner a gift is made, the sooner the clock starts counting up to the 7 year point after which the gift should not be taxed to IHT.

Divorce Risk

One of the risks around lifetime gifting is the concern that assets gifted to Child may become subject to divorce claims if Child gets divorced from their spouse (Spouse).

On divorce, the law assesses a couple's assets in (separate) marital and non-marital 'pots'. The marital pot broadly comprises value generated by the couple during the marriage.

Inheritances and gifts usually fall into the non-marital pot. In principle, the marital pot will be broadly shared, and the non-marital pot retained by the owner, subject to any claims by the financially weaker party to backfill their 'needs'.

Child's non-marital asset could be the target of needs-based claims. Enhancing this risk, the court is generous in assessing needs. If the couple has enjoyed a comfortable standard of living, 'needs' are deemed at a corresponding level.

Further, the smaller the marital asset base – the greater the proportionate risk to the non-marital asset. For example - if the divorcing couple have marital assets of £1 million and Child has non-marital assets of £3 million – it's no stretch to imagine that Spouse could secure a £2 million divorce settlement – effectively receiving half of the value of the non-marital asset – very far from what Parents would wish for.

Mitigating Divorce Risk

Divorce risk is a potential obstacle to lifetime gifting – which is why from a family law perspective, we may recommend a nuptial agreement to mitigate divorce risk. Whether a 'pre-nup' before marriage - or a 'post-nup' after marriage – a nuptial agreement allows Child and Spouse to agree the financial outcome of a potential divorce. The core protection envisaged for these purposes is that Spouse would agree to limit - or to wholly forego - claims against the planned lifetime gift.

Since the case of Radmacher in 2010, a fair nuptial agreement will usually be upheld by the court. It is therefore potentially a protective shield for gifted family wealth. Accordingly, we'd encourage anybody considering making a lifetime gift to ask the next generation to enter into nuptial agreement.

Planning A Lifetime Gift/Proposing A Nuptial Agreement

If Parents contemplate making IHT efficient gifts, tax advice should be taken early to scope out the tax benefits of disposing or retaining specific assets.

Having decided which asset(s) Parents wish to gift, they or their solicitor can explain the gifting plan and potential tax savings to the next generation. Critically, they explain their requirement that a nuptial agreement be signed before the lifetime gift is made. The specific terms of the agreement will depend on the nature of the proposed gift, and also on the Couple's and the recipient Child's financial circumstances.

In the context of gifting shares in a family business, protections written into the nuptial agreement for Child can also be protective of the family business in a divorce scenario. The nuptial agreement could:

• Exclude the transfer of Child's shares

• Excluding or limit capital claims against Child's shares

• Limiting or excluding income claims against Child's dividend income

• Require Spouse to resign any directorship / role in the business

• Spouse to surrender company property

• Spouse to vacate the business premises

• Spouse to forego employment / other claims against the business

• Spouse maintaining business confidentiality and not bad-mouthing the business

The Budget presents significant IHT implications for families with business interests. Timely planning including PETs, where appropriate, potentially supplemented with nuptial agreements, can assist in mitigating risk.