Protecting your estate — the role of prenups in inheritance tax planning

As sweeping changes to inheritance tax (IHT) approach, pre-nuptial agreements (prenups) are becoming an increasingly important part of estate planning. 

With reforms set to affect pensions, business relief, overseas assets and estate thresholds, couples should ensure that their prenups reflect their current financial position and future liabilities. 

Here, Duncan Bailey explores how these changes could shape the role of prenups in protecting your wealth.

Which IHT reforms need to be considered?

Pensions

One of the most significant upcoming changes to IHT is that pensions will now count as part of an individual’s taxable estate. This means that any unused portion of a pension pot will be taxed at the standard rate of 40% and has already led to a significant spike in people withdrawing pensions early to give away.

While that might seem like a quick fix to reduce an IHT bill, it’s important to remember that pensions are usually considered as part of an individual’s assets during divorce proceedings and therefore must be accurately disclosed. The court will consider the monetary value of a pension pot when they’re assessing what a reasonable division of assets looks like. 

If you’ve made changes to your retirement strategy, it’s worth reassessing any prenups to help make sure that they’re upheld fairly and reflect your current financial position. 

Changes in eligibility 

Liability to UK IHT will now be based on residence — not domicile. For couples where one person holds overseas wealth, those assets may no longer be solely affected by the prenup. 

Couples in this position must revisit their agreements, determine the extent to which this increases their liability and make any necessary amendments. 

The nil rate band 

The nil rate band — the threshold for IHT eligibility — is set to be frozen at £325,000. Historically, this allowance rose with inflation, meaning that expanding estates could still fall below it. With the freeze in place, estates that weren’t eligible when a prenup was created may now be exposed to tax. 

This emphasises the importance of staying on top of your estate planning and monitoring both the value of your estate and the rules that apply. 

To help avoid any unexpected IHT liabilities, a post-nuptial agreement can offer another layer of protection — helping to preserve the value of your assets if you separate or divorce.

Business relief 

Changes to business relief mean that inherited family businesses — including farms — will no longer receive the 100% relief rate. Instead, this will drop to 50%. 

Since this directly impacts businesses, it’s crucial to update any prenups.

Cohabitation agreements for unmarried couples 

Unmarried couples will be among the hardest hit by the upcoming IHT changes.

According to analysis from wealth management firm Quilter, couples who live together in an average-priced property (£290,395) but haven’t tied the knot could face an IHT bill of £82,152 under the new rules. This is because their pension pot may now be included in their estate — even if the person who passed away wasn’t yet of pension age. 

As such, any prenup-style cohabitation agreements should be revisited and revised to avoid a heavy tax burden.

Talk to us

While no couple gets married with divorce in mind, being prepared for every possibility is key. Getting the right legal support from experts who understand the shifting landscape of matrimonial law and the financial disputes that come with it is the first step.

For high-net-worth individuals especially, the stakes have never been higher. Transparency, pre-emptive legal advice and full financial disclosure aren't optional extras — they're critical requirements for protecting your wealth.

With Brabners Personal, you have access to our award-winning lawyers who work with you to put clear, fair pre- or post-nuptial agreements in place and guide you through every stage of the estate planning process. We stay up to date with legal and tax changes so you don’t have to.

Talk to us by giving us a call on 0333 004 4488, sending us an email at personal@brabners.com or completing our contact form below.