How tax changes after divorce?

Will you owe thousands in tax when you transfer the house to your ex? Does that settlement cheque count as income? These questions keep divorcing couples awake at night, and for good reason. The tax implications of divorce can slash your financial fresh start if you get them wrong. What matters: some transfers are tax-free, others trigger capital gains tax divorce bills, and timing is everything. You’re not expected to decode HMRC rules whilst managing emotional turmoil. A specialist divorce solicitor ensures you don’t accidentally gift the taxman money that should stay in your pocket.

Discover how to structure your divorce settlement tax-efficiently and avoid costly HMRC bills.

Do you need a solicitor?

We will connect you with the right solicitor, near you.

Find a solicitor near me Request a call

Deciphering your tax code after divorce

Your tax code determines how much tax your employer deducts from your salary, and divorce triggers changes you must report to HMRC.

Important tax code changes after divorce:

• Reverting to single status: Your tax code switches from married allowances to the standard personal allowance (£12,570 for 2024/25) once HMRC is notified of your marital status change.
• Marriage Allowance removal: The 10% personal allowance transfer to your spouse (worth £252 annually) ends upon separation; inform HMRC immediately to reclaim your full allowance.
• Updated records: Notify HMRC of address changes to prevent correspondence reaching your former marital home and update tax records accordingly.
• Child-related benefits: If you’re now the primary carer, update your claim for tax credits or child benefit with HMRC.

Capital gains tax and asset transfers during divorce

Capital gains tax divorce rules offer crucial exemptions during separation, but only within strict timeframes when dividing marital assets.

Transferring the family home

• CGT exemption: Family home transfers between spouses are capital gains tax free if completed before the end of the tax year following separation, or within three years if one spouse remains living there.
• Principal Private Residence Relief: The departing spouse can claim relief on their share if the property remains their main residence during the separation period.
• Post-divorce sales: Joint sales after divorce finalise trigger CGT on each owner’s share of gains exceeding £6,000 (2024/25), minus legal fees and estate agent costs.

Transferring shares, investments and other assets

• Spouse exemption deadline: Investments, shares, or business assets transfer CGT-free only until the tax year end in which you separate; miss this and face immediate tax on gains.
• Pension transfers: Pension sharing orders avoid income tax and CGT, making them highly tax-efficient settlement options.

The separation period exemption

• Critical timing: Transfers must complete by 5^th April following your separation to qualify for automatic CGT exemption without claiming additional reliefs.
• Documentation matters: Keep evidence of your separation date (separate households, financial independence) as HMRC may challenge exemption claims.
• How to avoid capital gains tax in divorce: Transfer assets during the exemption period rather than selling first, and utilise both spouses’ annual CGT allowances strategically.

Tax treatment of divorce settlements and lump sum payments

Settlement payments during divorce follow specific tax rules determining whether you pay tax on receipts or claim relief on payments.

Receiving a lump sum payment

• No income tax: Lump sum capital payments received as part of your divorce settlement are income tax-free, regardless of amount.
• CGT on asset sales: If the lump sum comes from selling marital assets, capital gains tax applies to the gain, not the payment itself.
• Pension lump sums: Money from pension sharing orders stays tax-free in your pension wrapper until withdrawal after age 55.

Tax on cash settlements

• Cash transfers exempt: Direct cash payments between spouses as part of a financial settlement are tax-free for recipients.
• Future investment income: Once invested, your settlement cash generates interest or dividends subject to normal income tax rules.
• No payer relief: The spouse making cash payments cannot claim tax relief or deductions.

Property settlements

• Property transfers: Transferring property within the separation period exemption avoids immediate CGT, but future sales may trigger tax.
• Mortgage takeovers: Assuming the mortgage creates no tax liability, though stamp duty may apply when buying out your spouse’s share above thresholds.

Income tax implications: Maintenance and spousal support

Maintenance payments carry different tax treatments for spousal versus child support, affecting both payer and recipient differently.

Spousal maintenance payments

• Tax-free for recipient: Spousal maintenance received is tax-free income requiring no tax return declaration, regardless of amount.
• No payer relief: Payers cannot deduct spousal maintenance from taxable income or claim any tax relief, even for substantial payments.
• Temporary maintenance: Maintenance pending suit during divorce proceedings follows identical rules; tax-free for recipients, no relief for payers.

Child maintenance payments

• Completely tax-neutral: Child maintenance is neither taxable for recipients nor tax-deductible for payers under any circumstances.
• All arrangements equal: Payments through the Child Maintenance Service or private arrangements follow identical tax treatment; no implications for either party.
• Direct expenses: School fees, medical costs, or extracurricular payments count as child maintenance and remain tax-neutral.

FAQs

• Do I pay tax on money from selling our jointly owned home after divorce? You’ll pay capital gains tax on your share of profit exceeding £6,000 (2024/25) if the sale happens after divorce and you’ve moved out, unless you qualify for Principal Private Residence Relief.
• Can I claim tax relief on legal fees for my divorce? Legal fees for divorce proceedings are not tax-deductible and cannot be offset against income or capital gains tax divorce liability.
• What happens to jointly held savings accounts and ISAs during divorce? Jointly held savings split tax-free as part of your settlement, but ISAs cannot transfer between spouses; you must withdraw funds (losing tax-free status) or agree who keeps which accounts.

Navigating the tax implications of divorce requires careful timing and strategic planning to avoid costly mistakes. Understanding capital gains tax divorce rules, settlement structures, and exemption deadlines protects your financial future and ensures you retain maximum value from your marital assets.

Secure YOUR FINANCIAL FUTURE!

Qredible’s network of specialist family law and divorce solicitors mastre how to avoid capital gains tax in divorce and structure your settlement for maximum tax efficiency.

KEY TAKEAWAYS:

• Your tax code reverts to single status upon divorce, ending Marriage Allowance transfers and requiring HMRC notification to avoid underpayment penalties.
• Capital gains tax divorce exemptions allow tax-free asset transfers only until the tax year end following separation; missing this deadline triggers immediate tax charges on property, shares, and investments.
• Settlement payments including lump sums are tax-free for recipients, while spousal maintenance and child maintenance carry no tax implications for either party, making specialist solicitor advice essential for maximising exemptions.