Divorce – capital tax, and wider, implications to consider

Lockdown has resulted in huge changes in our daily routines, not least that far more time has been spent together by those living under the same roof.  Unfortunately for some relationships, this has been the straw that broke the camel’s back.  Year on year divorce enquiries have reportedly increased by up to 40%.

Private Client advisers must be aware of the tax implications of divorce to help guide clients through this difficult time.  Below is a non-exhaustive reminder of some of the main tax, and wider, implications.

Capital Gains Tax (CGT)


During marriage(1), chargeable assets can be transferred between married couples without giving rise to CGT.  Such a transfer will be at ‘no gain, no loss’ so that the transferee is deemed to have purchased the asset for the same price that their spouse originally paid for it.

 When a married couple permanently separate, this beneficial treatment is lost from the beginning of the tax year after the year of separation, at which point they become connected parties for CGT purposes until the date of the decree absolute.  During this time transfers between the separated spouses take place at market value, regardless of the actual proceeds (if any) that are paid.  Unless there is a formal deed or court order ‘separation’ in these circumstances means separated in such circumstances that the separation is likely to be permanent.   This is likely to be of particular relevance to the matrimonial home (see below).  Any transfers made in the tax year of separation continue to be at ‘no gain, no loss’.

Following the decree absolute, the parties cease to be ‘connected persons’ and transactions between them will take place at the value agreed by the parties, unless it is not a bargain at arm’s length (in which case the market value will be substituted).  An example of a transaction taking place otherwise than by way of a bargain at arm’s length is a disposal under a court order, unless the court order takes place in the tax year of separation, in which case ‘no gain, no loss’ treatment can apply.

The matrimonial home

Married couples are able to have only one property as their main residence to which principal private residence relief (PPRR) applies.  Once separated, each spouse will be entitled to their own PPRR and any transfer of the matrimonial home between them in the tax year of separation will take place at ‘no gain, no loss’.

Following the tax year of separation, new rules which came into effect from 6 April 2020 give the spouse who moves out of the family home (the ‘leaving spouse’) only nine months in which to sell their interest before PPRR will cease to apply to their share of the property, and following which CGT will begin to apply to their share of the proceeds of sale.  Loss of PPRR for the leaving spouse can be mitigated by an election under section 225B TCGA 1992 provided the following conditions are met:

-          Before separating the couple lived in the property as their main home;

-          Having ceased living in the property, the leaving spouse retained an interest in it;

-          The other spouse (the remaining spouse) continued to live in the property; and 

-          The leaving spouse elected for no other property to be treated as their principal private

Where the property is then transferred by the leaving spouse to the remaining spouse under a court order or another agreement, PPRR is applied in full on the transfer by the leaving spouse.

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Inheritance Tax (IHT)

Transfers between spouses are exempt from IHT (subject to restrictions where a donee spouse is non-UK domiciled if they have not elected to be treated as UK domiciled for UK IHT purposes) until the date of the decree absolute.

After the decree absolute transfers between former spouses will be potentially exempt transfers or lifetime chargeable transfers and the normal IHT rules will apply to such transfers.  Transfers made under a court order are not usually ‘transfers of value’. 

Wider implications


Divorce does not revoke a Will but, upon the decree absolute, the Will will take effect as if their former spouse had pre-deceased them (unless a contrary intention is expressed in the Will).  For example, an appointment of a former spouse as an executor will cease to be effective, and the former spouse will no longer benefit as a beneficiary.  A divorcing individual is likely to want to ‘cut out’ their spouse before the decree absolute, in which case positive action will be required to change the Will.  If a Will is updated by Codicil (rather than a new Will) after the decree absolute, care should be taken to ensure that part of it is not inadvertently ‘republished’ by the Codicil, causing a former spouse to be reinstated as an executor or beneficiary.

The appointment of guardians for minor children is often – but does not have to be – included in a Will.  As parental responsibility lies with a child’s parents in the first instance, their divorce will not alter the default position which is that, on the death of one of the parents with parental responsibility, the surviving parent will continue to have parental responsibility even if they have divorced.

Powers of Attorney

Under a Lasting Power of Attorney, dissolution of marriage revokes the appointment of a spouse as attorney unless the terms of the instrument specifically provide otherwise. The same does not apply in relation to an Enduring Power of Attorney (EPA), although it would be possible to object to registration in favour of a former spouse on the basis that one of the grounds for objection to registration of an EPA is that, ‘having regard to all the circumstances and in particular the attorney's relationship to or connection with the donor, the attorney is unsuitable to be the donor's attorney’. If a former spouse is already registered as an attorney under an EPA, the court has powers to cancel its registration if, having regard to all the circumstances and in particular the attorney's relationship to or connection with the donor, it is satisfied that the attorney is unsuitable to be the donor's attorney.

(1) The terms marriage and spouse are used, but the rules apply equally to civil partnerships and civil partners.

For any further information, please contact Gavin Smith.

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