Safeguard your business: The power of pre-nups before share transfers

Since Chancellor Rachel Reeves announced tax changes during the Autumn Budget, we have seen many shareholders within family-owned businesses looking to bring forward their succession planning to avoid increased Capital Gains Tax (CGT) rates. Typically, shares are being passed to younger family members sooner (usually sons/daughters), but this can give rise to other issues – such as what will happen to those shares if the person receiving them later goes through a divorce or separation?

One very effective method of ensuring that the shares in the family business are protected as far as possible, is for the recipient to implement a pre- or post-nuptial agreement prior to the shares being transferred to them.

CGT changes and the impact on BADR

As of the 6 April 2025, the UK will implement changes to Capital Gains Tax (‘CGT’) rates, particularly affecting Business Asset Disposal Relief (BADR) and Investors’ Relief. The CGT rate for qualifying disposals under those reliefs will increase from the current 10% to 14%. This rate is set to rise further to 18% as of 6 April 2026. In addition to the above, the lifetime limit for qualifying gains under BADR has been reduced to £1 million for disposals made on or after 30 October 2024.

These adjustments are part of broader reforms to the UK’s tax system, aiming to increase tax revenues and address economic challenges. The changes are expected to predominantly impact business owners, entrepreneurs and investors leading to higher tax liabilities on qualifying gains.

What is a nuptial agreement?

A nuptial agreement is a contract which is entered into either before or during a marriage (or civil partnership). It governs the distribution of assets in the event of a divorce or separation.

For family business owners, a nuptial agreement can specifically outline what happens to the ownership of shares in the event of a divorce or separation. This ensures as far as possible, that a spouse who may not have been involved in the day-to-day running of the business, cannot lay claim to those shares.

The benefits for family-owned businesses

1. Ensures control over business succession: A nuptial agreement can protect the intended inheritance structure of the business by ensuring that shares are passed down to specific family members, such as children or grandchildren. This prevents potential conflicts if a business owner’s spouse decides to sell their shares or pass them on to non-family members, disrupting the family business’s continuity.
2. Minimises risk of business disruption: Family businesses thrive on long-term stability and continuity. In the unfortunate event of a divorce, a nuptial agreement can prevent the family business from becoming a point of contention, which could lead to the business being broken up, sold, or lost. By establishing clear guidelines regarding the transfer of shares, family members can avoid the potential distraction and financial strain that may arise during a divorce.

If you would like to know more about the topics discussed in this article, please do not hesitate to contact Stefan Donnelly or another member of the Birketts’ Family Team.