The tax consequences of divorce and separation

By The CA magazine

1 August 2015

Philippa Dolan, Alison Edmondson and Andrew Paterson consider the tax consequences of separation and divorce.

Solicitors and accountants are often consulted by clients whose personal relationships are coming to an end.

There are a number of specialist issues that can arise in these circumstances and some important differences between Scots law and the law of England and Wales.

Transfers between spouses

The logical starting point is Section 58 of the Taxation of Chargeable Gains Act 1992 (TCGA 92), which states that the ability to transfer assets between spouses or civil partners on a "no gain, no loss" basis subsists for the whole of the tax year in which the parties were living together.

Accordingly, this facility may be very helpful for separating couples who are able to arrange for any asset transfers to take place during the tax year in which they separate. That allows the recipient to acquire the asset at the transferor's base cost without incurring an immediate charge to capital gains tax. The court order or contract must pre-date the end of the tax year during which separation occurred.


For the vast majority of Scottish cases, the parties' financial arrangements will be the subject of negotiation and there will be no court order in relation to financial matters.

Once negotiated, the arrangements between the parties will be contained within a minute of agreement, which is simply a private contract between the parties. It is sufficient that that contract is concluded prior to the end of the tax year, even if its terms are not implemented until a later tax year.

For more complex situations it is important to note that any suspensive conditions in such a minute of agreement must be purified before the end of the tax year of separation. It goes without saying that negotiation of financial arrangements and conclusion of a contract within the tax year is significantly more likely if separation occurs late in April than if it occurs late in March.

England and Wales

The situation in England and Wales is almost identical to that in Scotland. The only difference – which applies in respect of all aspects of financial settlements on divorce – is that there can be no binding agreement without a consent order made by the court. Having said that, if a couple reach an open written agreement that
has all the characteristics of a binding contract, then they will almost certainly be held to it by the court, provided its terms are not outside the parameters of what the court would order. As always, this ensures a lack of clarity and certainty in the English position.

Principal private residence relief (PPRR) 

When an interest in a house is transferred between spouses in connection with their divorce outwith the tax year in which the parties were living together, TCGA 92 Section 225B provides a useful extension to the availability of PPRR.

The transferor spouse may claim PPRR from the date his/her occupation ceases until the date of transfer if the following conditions are met:

  • The property was the transferor's main residence prior to the separation;
  • The property continued to be the transferee's main residence until the date of transfer; and
  • The transferor cannot elect for any other property to be treated as his/her main residence until after the date of transfer.
  • Of course, divorce can also give rise to a capital gains tax planning opportunity because a divorced couple, unlike parties living together, can claim PPRR in respect of separate properties. 

Hold-over relief 

Although heritable properties are the assets most frequently transferred on separation, the next most common asset class transferred is probably an interest in a family business.

Even where the transfer (or contract or court order for transfer) post-dates the end of the tax year of separation, it may well be possible to defer the tax charge by applying for hold-over relief on the gift of business assets. This would require the agreement of both parties.

Naturally, hold-over relief will only be available if the underlying assets themselves meet the usual qualification criteria. Shares in trading family businesses are often eligible but some non-trading assets, such as certain
property investments, are much less likely to meet the qualification criteria.

Theoretically speaking, in calculating the amount eligible for hold-over relief, it is necessary to deduct any consideration given by the spouse or civil partner receiving the asset. If the asset is transferred in exchange for the recipient relinquishing a right to alternative financial provision, the value of the right so surrendered is included in calculating the consideration, unless the asset is transferred under the provisions of a court order or a consent order ratifying a previous agreement.

This raises a technical difficulty in Scotland where, as suggested above, very few financial provision cases are ever the subject of determining court orders. It is generally acceptable practice that a minute of agreement registered in the Books of Council and Session would be sufficient. However, in the absence of clear legislative authority for that proposition, if the exposure to capital gains tax is particularly significant, it may be worth incurring the expense and taking on the potential risks involved in obtaining orders of the court.

Alternatively, entrepreneurs' relief may assist to mitigate a capital gains tax liability on the transfer of a business asset if the relevant conditions are met.

Retention of assets with locked-in gains 

In England and Wales, future contingent tax liabilities are always taken into account unless immaterial or too remote. In contrast, it was widely believed in Scotland that future contingent tax liabilities locked into an asset will not be taken into account by the court when determining financial provision on divorce/dissolution.

The party retaining such an asset was advised that he/she would simply need to bear the cost of the tax at the point in future when it arose. However, since a decision of the Court of Session in 2013, the position may be rather more nuanced.

Accordingly, it is now inappropriate to tender simplistic advice that future potential liability to capital gains tax is irrelevant in negotiating or litigating financial provision on divorce in Scotland.

The case referred to the court did make an adjustment in respect of a husband's prospective liability to capital gains tax on his future disposal of shares because the court was satisfied that a sale of those shares was by no means hypothetical.


When the breakdown of a marriage or civil partnership occurs, unexpected or unavoidable tax liabilities can only worsen a difficult situation.

In addition to the above areas, the loss of the joint inheritance tax exemption may have implications for past and future tax planning. There could also be other tax opportunities or pitfalls arising from treatment of pension assets, lost opportunities around personal allowances or the need for a reassessment should one half of the couple have non-domiciled status.

Clients should further be aware that maintenance payments are treated as taxed income in the hands of the payee.

While tax considerations are likely to be the last topic on most couples' minds during a divorce, advisers can encourage prudent tax planning which benefits both parties.

About the authors

  • Philippa Dolan is a partner with Collyer Bristow
  • Alison Edmondson is a director with Sheehan Kelsey Oswald
  • Andrew Paterson is a senior associate with Murray Beith Murray


  • Tax
  • CA Magazine

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