Family Bulletin - Spring/Summer 2016

Judges say that they will ignore pre-nups unless couples are rich, warned the Daily Mail recently.

04 Aug 2016
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The Dangers of a Daily Mail Headline

Just to unsettle even more all those who may have recently entered into or be contemplating a pre-nup, the headline went on to proclaim that the “majority of agreements are a waste of time”.

Family lawyers must have missed a pretty ground-breaking change in legislation for this to be the case because, as far as we all know, the Supreme Court decision in the Radmacher v Granatino decision back in 2010 is still good law. That case provided that the test to be applied in determining whether pre-nups should be upheld is as follows:

“The court should give effect to a nuptial agreement that is freely entered into by each party with a full appreciation of its implications unless in the circumstances prevailing it would not be fair to hold the parties to their agreement”.

So where did the Daily Mail get its inside information from? The answer is from the guide recently issued by the Family Justice Council on “Sorting out Finances on Divorce” which is designed to help those navigating the family justice system without the assistance of lawyers.

Interestingly, the guide specifically states that it does not deal with the situation where a couple has entered into a pre-nuptial agreement and pre-nups are only briefly dealt with in the FAQ section of the guide (there is just one paragraph dedicated to them).

The guide explains that the ultimate test for determining whether a pre-nup should be upheld is one of fairness and that the courts will not regard an agreement as fair if it does not meet needs. That follows from the Radmacher decision.

However, there are all sorts of circumstances and considerations that will be taken into account in determining needs. It is not, as the Daily Mail has suggested, a case of “trying to make sure both parties live as closely as they can afford to the lifestyle they enjoyed before their divorce”. Case law provides that needs do not need to be subjectively interpreted (i.e. they do not necessarily have to mirror the lifestyle enjoyed during the marriage). In addition, the courts will look at other factors such as the length of the marriage and whether there are any children.

Couples choose to enter into pre-nups for all sorts of reasons. Often young couples, who do not yet have any wealth in their names, are encouraged to do so by parents who wish to ensure that future bequests are protected. Equally, couples who may not have the benefit in the future of a windfall wish to protect the basic assets that they have acquired in the event that they only enjoy a short, childless marriage. Often couples who have very limited wealth wish to enter into a pre-nup simply because they hope that one day the legislation in England and Wales may catch up with many of our European counterparts and enshrine the binding nature of agreements in our legislation.

Many couples wish to be able to choose to regulate their financial affairs in the way that they choose, and indeed the courts encourage people to exercise their autonomy in deciding their financial futures. Pre-nups are not the answer for everyone and it is right that there will be situations where, in the absence of enough surplus wealth to meet needs, a pre-nup cannot be upheld. But it is equally important that scaremongering headlines do not deter people who would like to have the autonomy to decide how to arrange their finances in the event of a marital breakdown from doing so. Every couple is different and there is not a “one size fits all” solution to determining whether pre-nups should be upheld.

When tax planning for families with young children, it is surprising how the opportunities presented by the often forgotten provisions of section 11 of the Inheritance Tax Act 1984 are overlooked by some advisers. This section provides, amongst other things, that where one party to a marriage makes a “disposition” (i.e. a gift) to a child of either party to that marriage which is for the maintenance, education or training of that child then that gift is not a transfer of value.

What does this mean in plain English? Well, when a gift is not a transfer of value it means that the gift has no inheritance tax (IHT) implications. It will be outside of the IHT regime. Consequently, there will be no IHT on the gift, even if the parent dies within seven years (or, indeed, immediately) after making the gift.

Section 10 of the Inheritance Tax Act 1984 contains a similar provision which applies to “dispositions” made on divorce or the dissolution of a civil partnership for the benefit of a former spouse or civil partner. The provisions of this section of the Act require that the person making the disposition didn’t intend to confer any gratuitous benefit on the receiving party.

In most cases dispositions made on divorce or on the termination of a civil partnership are made following arm’s length negotiations or under the terms of a court order and so it is generally accepted that there is no intention to confer any gratuitous benefit, and so those dispositions will be within the section 10 exemption.


Let’s take the example of Mr and Mrs Vincent, a wealthy couple, who are divorcing and have two sons, Daniel and Jack, who are about to start a fee paying primary school. They will stay at the same school through to completion of their A-levels. Their school fees total £50,000 per school year, so over the course of their primary and secondary education their school fees (excluding any annual fee increases) will total £500,000.

As part of the court order made on their divorce it is agreed that:

  1. Mr Vincent will set aside £500,000 to cover the school fees; and
  2. Mr Vincent will purchase a property for Mrs Vincent and the children to live in. The property will be settled into trust for Mrs Vincent and on her death it will pass to the children. The property will cost £500,000

School Fees

Mr Vincent can create a trust for the benefit of Daniel and Jack and place the school fees into that trust. Ordinarily, when transferring assets of this size into trust Mr Vincent would have to pay an IHT charge at a rate of 20% - called an IHT Entry Charge - on the value the assets transferred into trust in excess of his available nil rate band. There would also be the potential for a further IHT charge if he died within seven years of setting up the trust, and if he created further trusts during that seven year window then further IHT charges would arise on the creation of those trusts.

However, using the section 11 relief, Mr Vincent can transfer this money into a trust for the benefit of Daniel and Jack, without any IHT implications for his estate. A further advantage is that any growth in the value of the trust assets will be outside of Mr Vincent's estate. IHT charges will apply within trust, but the tax payable by the trust will be substantially less than the tax payable by Mr Vincent's estate if the cash remained in his estate on his death.

Careful planning is required: it is important to make sure that the trust does not continue beyond the completion of the children's full-time education. It is also important for Mr Vincent to calculate carefully how much money to put into the trust for two reasons. Firstly, Mr Vincent must be able to demonstrate to HMRC that the funds in trust are for the children's maintenance, education and training needs and that they are not excessive. Having calculated that Daniel and Jack require £500,000 to cover their education costs Mr Vincent cannot put twice that amount into trust in an attempt to move further value out of their estate. In those circumstances the funds in excess of the children's educational costs will not get the benefit of the section 11 relief.

The Property

The transfer by Mr Vincent of the property into trust for Mrs Vincent is made pursuant to the court order and so is protected by the section 10 exemption, on the basis that Mr Vincent is not intending to confer gratuitous benefit on Mrs Vincent. An alternative analysis is that it is not a disposition at all because the liability on Mr Vincent to transfer the property to the trust is imposed on him by law under the terms of the court order. Either way the tax position is the same; there will be no IHT to pay on settling the property into the trust and no further IHT charges in Mr Vincent’s estate if Mr Vincent died within seven years of setting up the trust. As with the school fees, IHT charges will apply within trust, but the tax payable by the trust will be substantially less than the tax payable by Mr Vincent's estates if the property remained part of his estate.

Consequently, over a relatively short period of time we have seen Mr Vincent can make provision for his wife and children under the terms of the court order to the tune of £1m, none of which, with careful planning, will have any IHT implications for his own estate.

For many years, it has been said that the law in this country has failed to keep up to speed with social and medical developments when it comes to issues concerning surrogacy. But a judgment handed down in the last few days by the President of the Family Division may finally see some long-awaited progress being made to the complexities that often blight surrogacy cases in this country.

Section 54 of the Human Fertilisation and Embryology Act provides that only couples are allowed to apply for a Parental Order (which extinguishes the parental responsibilities of the surrogate and gives a legal status to the commissioning parents).

This has meant that a single parent who commissions a surrogacy arrangement cannot apply for a Parental Order and has increasingly led to the problematic situation whereby the resulting child is left in a state of legal limbo. The fact that a single parent can apply for an Adoption Order (which has the same outcome as a Parental Order but isn’t always an option in surrogacy cases) only serves to highlight how troublesome the law is.

However, the President has now made a formal declaration that English law unfairly discriminates against single parents with children born through surrogacy and is incompatible with their human rights. In a remarkable development, the Secretary of State for Health has also acknowledged that the law is incompatible with human rights legislation. Such declarations are rarely made and the judgment marks a significant move towards bringing English laws on surrogacy into check with modern-day family units.

Whilst it remains to be seen whether Parliament will take steps to remedy the law, it would be almost unprecedented for legislation not to be changed following on from a declaration of incompatibility from the High Court. As and when this happens, it will bring such much needed progress to this area of the law.


If you would like more information or advice on Family law issues, please contact Lois Langton or a member of our Family team.


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