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Understanding the tax implications of divorce

When a couple is separating or undergoing divorce proceedings, tax issues are often not the first thing on their minds. However, alongside the emotional challenges, it is important to understand the tax implications of divorce can have a significant impact.

Changes to the Capital Gains Tax (CGT) rules for divorcing couples took effect on 6 April 2023. These changes extended the period during which spouses and civil partners can make transfers between each other without triggering CGT. The no gain/no loss rule now lasts up to three years after they stop living together. Additionally, if the couple has a formal divorce agreement, there is no time limit for these transfers. Before this change, the no gain/no loss treatment only applied to disposals in the tax year of the separation.

There are also specific rules for people who continue to have a financial interest in their former family home after separating. These rules allow them to claim private residence relief (PRR) when the home is eventually sold, provided certain conditions are met.

During divorce proceedings, it is crucial to reach a fair financial agreement, if possible, as this can help avoid further legal complications. If an agreement cannot be reached, the court may step in to issue a "financial order." Both parties and their advisers should also carefully consider the future of the family home, any family businesses, and the potential Inheritance Tax consequences of the separation or divorce.