Divorce is financially complex, and tax implications are often overlooked during settlements. Transfers between spouses are tax-free — but only up until the end of the tax year of separation. After that, different rules apply. This guide covers the key tax considerations.
The tax year of separation
Transfers of assets between spouses are free from Capital Gains Tax if they occur in the same tax year as separation (or before the divorce is finalised, up to 3 years from separation under rules introduced in 2023). After this window, transfers are treated as disposals at market value and may trigger CGT.
Capital Gains Tax on property
If the family home is transferred to one spouse as part of the settlement within the permitted window, no CGT is due. If it is sold on the open market, Private Residence Relief covers the period it was your main home. Complications arise if one spouse moved out — they get relief for the time they lived there plus a final 9-month period.
Pension sharing orders
A pension sharing order splits the pension at the point of divorce. The receiving spouse gets their own pension pot. Key tax points:
- The transfer itself is not taxable
- The received pension is taxed as income when drawn (just like any pension)
- The Annual Allowance is not affected by receiving a pension credit
- The transferred amount reduces the original member's pension for Lifetime Allowance purposes
Maintenance payments
Spousal maintenance and child maintenance are not taxable income for the recipient and not tax-deductible for the payer (for arrangements made after March 1988). They are simply cash transfers between individuals.
Marriage Allowance
If you have been receiving or transferring the Marriage Allowance, it ends in the tax year of separation. Notify HMRC to avoid being underpaid or overpaid.
Impact on your personal tax
Post-divorce, you are taxed as an individual. If you were previously benefiting from one spouse's unused Personal Allowance (via Marriage Allowance), your tax will increase. If you now have rental income from a property transferred to you, that is added to your income. Use the income tax calculator to model your new single-income tax position.