Divorce is inherently challenging, and the financial implications can add further complexity. One critical area that requires careful consideration is the potential Capital Gains Tax (CGT) liability arising from the division of assets. Recent updates to HMRC’s guidance, particularly concerning the treatment of the family home, underscore the importance of obtaining specialist legal and tax advice during divorce proceedings.
Capital Gains Tax is a levy on the profit made when selling or disposing of an asset that has increased in value. In the context of divorce, CGT considerations often arise when transferring or selling assets such as the family home, investments, or business interests.
Historically, transfers of assets between spouses or civil partners were treated on a “no gain, no loss” basis, meaning no immediate CGT liability arose. However, this treatment was limited to transfers made before the end of the tax year in which the couple separated. Recognising the challenges this posed, the Finance Act 2023 extended the “no gain, no loss” window, providing separating couples with more time to organise their affairs without immediate tax consequences. The extension applies to disposals made on or after 6th April 2023, allowing separating spouses three tax years after the tax year of separation to make no-gain, no-loss transfers, and this treatment also applies to disposals made under a formal divorce agreement regardless of timing.
In February 2025, HMRC revised its Capital Gains Manual, specifically section CG65334, addressing scenarios where the family home is owned entirely by one spouse (e.g., the husband) but, following a court order, a portion of the future sale proceeds is allocated to the non-owning spouse (e.g., the wife).
Previously, HMRC’s position was that the non-owning spouse would receive such payments tax-free. However, the February 2025 update suggested that these payments could be subject to CGT under section 22 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992), treating them as “capital sums derived from an asset”.
This interpretation raised concerns about potential double taxation, as it implied that both the owning and non-owning spouses could be taxed on the same asset. Following representations from professional bodies, HMRC revised its stance. The latest guidance clarifies that if a court orders a specific sum to be paid to the non-owning spouse from the sale proceeds, and this does not alter the beneficial ownership of the property, then the payment is not considered a capital sum derived from an asset. Consequently, the non-owning spouse would not be liable for CGT on this amount.
A critical distinction arises between court orders that allocate a specific monetary sum versus those that assign a percentage of future sale proceeds to the non-owning spouse. In the latter case, the non-owning spouse acquires a contingent right to an unascertainable amount, which is considered a separate asset a “chose in action” for CGT purposes, as established in the case of Marren v Ingles [1980]. This means the non-owning spouse could be liable for CGT upon receipt of the funds.
Therefore, the precise wording of financial orders in divorce proceedings is paramount. Legal practitioners must carefully consider the tax implications of different settlement structures to avoid unintended tax liabilities for their clients.
Given the complexities outlined, divorcing couples should:
Navigating the intersection of divorce and tax law requires meticulous planning and informed decision-making. The recent updates to HMRC’s guidance highlight the potential pitfalls that can arise without specialist advice. To safeguard your financial interests and ensure compliance with tax obligations, it is imperative to consult with professionals experienced in both family and tax law.
If you’re facing divorce and are concerned about the tax implications of your financial settlement, our team of experienced divorce specialists are here to help. We will work with you and experienced tax advisors to review your settlement. Contact us today to schedule a consultation and ensure your settlement is structured in the most tax-efficient manner possible.
