Ever since I have been in practice – and that is a very long time – there has been a popular myth that Prenuptial Agreements are simply not enforceable in the United Kingdom.
The source of the myth is almost certainly the fact that until a few years ago, prenups were generally unenforceable in England. Happily, the situation has now changed in England, but it didn’t have to change in Scotland! Although very rarely tested by the courts, prenups have always been regarded in Scotland as binding on the parties and enforceable. The same applies to such Agreements which are occasionally made after marriage and which are referred to as postnups.
Despite the effectiveness of prenups in Scotland, it has still taken a long time for their use to be a regular occurrence, although, we are certainly seeing more use of them now. They are still seen by many as anti-romantic and a portent of difficult times ahead!
There is one area where I think far greater use of prenups could and should be made. As a firm, we frequently become involved in advising clients on the transfer of assets passed down the generations, usually to minimise exposure to inheritance tax. While parents are clearly demonstrating financial prudence when making such plans, they often overlook the difficulties which will be created should the lucky recipient offspring subsequently separate from his/her spouse.
It is established, by statute, that capital which is acquired by an individual by way of gift from a third party, such as a parent, or inheritance is excluded from matrimonial property and, if it is in the same form at the point of separation as it was at the point of donation, it will be “left out of the pot” on divorce.
However, it is comparatively unusual for capital gifted in this way to be retained by the recipient in its original form. It is much more common for the capital to be used for a specific purpose of project, such as buying a bigger house. As soon as the capital sum acquired changes its form, the newly acquired asset will be matrimonial property. One of the key messages which we try to get across to individuals who are acquiring capital in this way is “not to intermingle”. If at all possible, you should keep your capital acquired by way of gift or inheritance ring-fenced so that the other party cannot say that it has become matrimonial property.
Prenuptial or Postnuptial Agreements
The only way in which capital thus gifted can be completely protected is by the use of a prenuptial or postnuptial Agreement. While the married couple themselves may not be happy at the idea of pre-arranging what would happen in the event of their divorce, the last thing the donor parent would want would be to risk exposing their donation to a claim by an errant son or daughter-in-law. One has to remember that conduct is left out of account when considering the division of matrimonial property.
Accordingly, it will always be open to parents in such a situation to say that they are only prepared to make such a gift if the offspring and his/her spouse are prepared to enter a prenup or a postnup to ensure that the gifted capital remains within the family.
Turcan Connell’s Family Law Team liaise with our colleagues in Tax and Succession over such matters and if you wish to consider the possibility of protecting a gift by way of a prenuptial or postnuptial Agreement, please do contact us.