How divorce can affect property, pensions, investments and future tax bills.

Divorce or the end of a civil partnership is never just about paperwork. There are often some difficult personal and financial decisions to make, and understandably, tax probably isn’t the first thing on your mind.

However, it is something that needs to be considered before a financial settlement is agreed.

A division of assets can look perfectly fair on paper, but the after-tax position may tell a different story. One person might receive an investment carrying a significant built-in gain, move out of the family home, take on a property and its mortgage, receive a share of a pension or become responsible for claiming Child Benefit.

All of these can have tax consequences.

The important thing is to understand those consequences before you sign a settlement and move the assets, rather than discovering them afterwards.

To put the subject into context, the latest Office for National Statistics release reported 103,816 legal partnership dissolutions in England and Wales in 2023, comprising 102,678 divorces and 1,138 civil partnership dissolutions. Divorce rates were 8.6 for men and 8.5 for women per 1,000 married individuals.

Timing can make a big difference

One of the first things I would establish is the timeline.

For tax purposes, seemingly simple dates can make a considerable difference, including when you stopped living together, whether the separation was likely to be permanent, when the conditional order or decree nisi was made, when the final order or decree absolute was made, when a financial agreement or consent order was approved, when assets were transferred or sold, and when somebody moved out of the family home.

These dates can affect Capital Gains Tax (CGT), property tax, pensions, Child Benefit, Marriage Allowance and Inheritance Tax planning.

For CGT purposes, HMRC treats spouses and civil partners as living together unless they are separated under a court order, by a formal deed of separation, or in circumstances where the separation is likely to be permanent.

Simply living in different houses does not automatically mean you are separated for these rules if the marriage or civil partnership has not broken down.

Capital Gains Tax and transferring assets

CGT is one of the main areas I would look at during a divorce.

While spouses or civil partners are living together, transfers of most assets between them generally take place on a “no gain/no loss” basis.

In simple terms, the person transferring the asset does not trigger an immediate CGT charge. Instead, the person receiving it effectively takes over the original base cost for future tax purposes.

The current separation rules first applied to disposals made on or after 6 April 2023 and give separating couples a longer period in which assets can be transferred on this basis.

If you and your spouse or civil partner were living together at some point during a tax year, assets can be transferred on a no gain/no loss basis until the earlier of:

• The end of the third tax year following the tax year in which you stopped living together; or
• The date the court grants a divorce, annulment or dissolution.

Importantly, transfers made under a formal divorce or separation agreement or court order can qualify for no gain/no loss treatment without a time limit.

This is why the legal documentation surrounding a settlement can be so important.

Don't just look at the family home

The family home understandably gets a lot of attention, but it isn't the only asset that may have a future tax liability attached to it.

Buy-to-let properties, second homes, shares, investment portfolios, cryptocurrency, business shares, commercial property, land, valuable personal possessions and overseas assets may all need reviewing.

Someone receiving an asset under the no gain/no loss rules might not pay tax when they receive it, but they can inherit its original tax base cost.

If they later sell it, CGT may therefore be calculated on the gain since the original purchase, rather than simply the increase in value since the divorce.

For 2026/27, the CGT annual exempt amount for individuals is £3,000. For gains made from 6 April 2026, basic rate taxpayers pay CGT at 18% on gains within the basic rate band and 24% on gains above it. Trustees and personal representatives pay CGT at 24% from 6 April 2026.

This is why I would always encourage somebody to compare assets on an after-tax basis.

£200,000 in cash and an investment portfolio valued at £200,000 are not necessarily worth the same amount if that portfolio contains a substantial unrealised gain.

What happens to the family home?

The family home is often the largest asset involved and can also be one of the more complicated tax areas.

Private Residence Relief can reduce or eliminate CGT when you sell a property that has been your only or main residence.

For spouses and civil partners living together, there can only be one main residence between them for the purposes of the relief. After separation, each person may have a different only or main residence.

Where somebody moves out of the matrimonial or civil partnership home and later sells or transfers their share, they may be entitled to Private Residence Relief for the period before they moved out, plus the final nine months of ownership.

There are also special rules where somebody retains an interest in the former family home and it is eventually sold under a formal divorce or separation agreement or court order.

In some circumstances, the person who moved out can choose to treat the period after leaving as though the property remained their only or main residence, provided the necessary conditions are met.

However, making that choice can affect the relief available on another home bought after moving out, so this is something I would want reviewed before the property is sold.

Stamp Duty Land Tax and mortgages

For properties in England and Northern Ireland, Stamp Duty Land Tax (SDLT) does not apply where an interest in land or property is transferred to a spouse or civil partner as part of an agreement or court order because the couple are divorcing, dissolving a civil partnership, annulling a marriage or legally separating.

In those circumstances, HMRC does not need to be told about the transfer, even where the value exceeds the SDLT threshold.

This is different from certain other property transfers. For example, unmarried joint owners transferring a larger share of a property between themselves can potentially have an SDLT liability where money changes hands or mortgage debt is taken over.

Wales and Scotland also have their own systems - Land Transaction Tax in Wales and Land and Buildings Transaction Tax in Scotland - so the position should always be checked according to where the property is located.

The mortgage needs considering too.

If one person is keeping the family home and taking over the mortgage, the lender will usually need to agree. Outside the special divorce and separation rules, taking responsibility for mortgage debt can also count as chargeable consideration for SDLT purposes.

Before agreeing that one person keeps the property, I would therefore want to know whether the lender will release the other person, whether the transfer falls within the divorce or separation SDLT rules, whether either person retains an interest in the property and whether a future sale could result in CGT.

I'd also want to know whether the person moving out intends to buy another property.

Don't overlook pensions

Pensions can be one of the most valuable assets within a marriage, but because you can't necessarily see or access the money today, they're also very easy to undervalue.

A pension sharing order can give one person a percentage of the value of their former spouse or civil partner's pension rights.

The reduction in the original member's rights is known as the pension debit, while the amount allocated to the former spouse or civil partner is the pension credit.

This isn't simply money handed over as cash. The recipient becomes entitled to pension benefits in their own right, with those benefits taxable in their hands when eventually taken, depending on the pension scheme and how they access it.

Pensions therefore need to be considered alongside tax, retirement plans, age, health, income requirements and the type of scheme involved.

Defined benefit pensions, public sector pensions and pensions already in payment may require specialist advice.

Maintenance payments

Child maintenance payments are not taxable for the recipient and do not affect benefits, including Universal Credit.

Spousal maintenance is different, although most modern divorce maintenance arrangements don't provide a straightforward tax deduction for the person making the payments.

A limited Maintenance Payments Relief still exists where specific conditions are satisfied, including that either person was born before 6 April 1935.

For 2026/27, this relief is worth 10% of qualifying maintenance payments, up to a maximum tax reduction of £453.

Where maintenance forms part of a settlement, both parties should therefore understand how it affects their wider tax and cash-flow position.

Child Benefit can change after separation

If children are involved, Child Benefit should also be reviewed.

For 2026/27, Child Benefit is £27.05 per week for the eldest or only child and £17.90 per week for each additional child.

The High Income Child Benefit Charge applies where the higher earner in a couple has adjusted net income above £60,000. It is based on that person's individual income rather than the couple's combined income.

The charge gradually claws back Child Benefit between £60,000 and £80,000, with the full Child Benefit amount being clawed back once adjusted net income exceeds £80,000.

Following a permanent separation, the former partner's income is no longer taken into account. The threshold instead applies to the parent receiving Child Benefit or their new partner, where applicable.

Separation can therefore change who should claim, who might become liable for the charge and who receives valuable National Insurance credits.

Marriage Allowance and tax codes

Marriage Allowance allows eligible married couples and civil partners to transfer £1,260 of one person's Personal Allowance to the other.

For 2026/27, the standard Personal Allowance is £12,570, and the transfer can reduce the receiving partner's tax bill by up to £252.

Marriage Allowance must be cancelled where the relationship ends through divorce, dissolution of a civil partnership or legal separation.

Tax codes may also need updating following changes to somebody's name, address, employment benefits or taxable income. It's a relatively small administrative point, but one that can easily get forgotten when there are much bigger things going on.

Inheritance Tax, wills and estate planning

Divorce can have a significant effect on estate planning.

Transfers between spouses and civil partners are generally exempt from Inheritance Tax while the marriage or civil partnership continues, but that position changes following divorce or dissolution.

Existing wills should also be reviewed because divorce can affect how their provisions operate.

For 2026/27, the Inheritance Tax nil rate band is £325,000 and the residence nil rate band is £175,000.

The residence nil rate band is available where a qualifying residence passes to direct descendants, subject to the relevant conditions, and the taper begins where the net estate exceeds £2 million.

HMRC states that qualifying estates can continue to pass on up to £500,000, or up to £1 million for a surviving spouse or civil partner where the relevant unused allowances are available.

After a separation, I would recommend reviewing your will, pension death benefit nominations, life insurance policies, jointly owned property, trusts, guardianship wishes for children and any powers of attorney.

Tax planning and legal planning really need to work together here.

What if you own a business together?

Where one or both spouses own a business, there can be another layer of complexity.

You may need to consider whether shares are being transferred, whether no gain/no loss CGT treatment applies, the company's distributable reserves, changes to dividends, whether both people remain directors or employees, whether one person is exiting the business, whether a valuation is required and the terms of any shareholder agreement.

Dividend tax rates changed for 2026/27. The dividend allowance remains £500, while the dividend tax rates are 10.75% for basic rate taxpayers, 35.75% for higher rate taxpayers and 39.35% for additional rate taxpayers.

If company shares form part of a divorce settlement, I would always recommend reviewing the position before anything is signed.

The legal value of those shares, their tax base cost, future dividend rights and the control they provide aren't necessarily the same thing.

A note for unmarried couples

Many of the special tax rules I've discussed apply specifically to spouses and civil partners.

Unmarried couples should therefore take particular care because the tax treatment can be very different, particularly for CGT, SDLT, Inheritance Tax and pensions.

For example, where unmarried joint owners transfer an interest in a property from one owner to another, there can be an SDLT position if consideration is given, including taking over mortgage debt.

Living together does not automatically provide the same tax treatment as marriage or civil partnership.

Before agreeing a settlement

There is quite a lot to consider, which is exactly why I wouldn't leave the tax review until after an agreement has been reached.

Before finalising a divorce or dissolution settlement, I would want to establish what each person owns, whether any assets contain built-in gains, whether transfers qualify for no gain/no loss CGT treatment, and what happens to the family home.

I'd also look at mortgages, pensions, maintenance, Child Benefit, the High Income Child Benefit Charge, Marriage Allowance, tax codes, wills and pension nominations, as well as any business shares or company income involved.

Summing up

Tax planning during a divorce isn't about making a settlement less fair. Quite the opposite – it's about understanding what each person is actually receiving once tax is taken into account.

Two assets with exactly the same value on paper can leave their owners in very different financial positions.

Timing, ownership, residence history and future plans can all change the outcome, particularly where property, pensions, investments, businesses or Child Benefit are involved.

The best time to review all of this is before the financial order is finalised and before assets are transferred.

That way, everyone has a clearer picture of the real after-tax position and there is less chance of an unexpected tax bill appearing further down the line.

If you're going through a divorce or separation and would like help understanding how property, pensions, investments or Child Benefit could affect your tax position, please get in touch.