Busting common myths about CGT and divorce

Capital gains tax (CGT) on divorce has long caused confusion. For years, separating couples faced tight deadlines and surprise tax bills when transferring assets. Changes in 2023 brought welcome clarity but some myths still linger. Whether you’re navigating divorce yourself or advising someone who is, understanding the CGT landscape is essential.

Myth 1: Asset transfers between spouses are CGT-free

Not true. Spouses can usually transfer assets between themselves without triggering an immediate CGT charge. This is called a “no gain/no loss” transfer.

It means the receiving spouse takes on the original cost of the asset, so no CGT is due at the time of transfer. But this doesn’t make the asset CGT-free forever. If the receiving spouse sells it later, CGT may apply based on the original cost and the gain made.

In short: the tax is deferred, not eliminated.

Myth 2: You’re only considered separated once the divorce is final

Not true. For CGT purposes, separation starts when the couple stops living together not when the divorce is finalised.

HMRC defines separation as:

• Under a court order
• Through a formal deed 
• Where it’s likely to be permanent

This matters because CGT rules change from the date of separation, affecting how and when assets can be transferred on a no gain/no loss basis.

Myth 3: The spouse who moves out automatically loses PPRR (Principal Private Residence Relief) on the family home

Not true. This is a common misconception. The rules are in fact more flexible.

PPRR can mean no CGT is payable when someone sells their main home. It’s always worth seeking advice to confirm the relief applies—particularly where the property has extensive grounds or has business uses, where multiple properties are owned or where a person has been absent from a property. 

Historically, PPRR only applied while the individual lived in the property. If one spouse moved out and the home was sold years later, they risked losing the relief. 

Since April 2023, the rules are fairer. Provided the departing spouse retains a legal or beneficial interest in the family home and the other spouse continues living there, the departing spouse can elect to treat the family home as their main residence until it is sold. This means they can benefit from PPRR on its sale. Whether to make that election needs specialist advice, especially if they’ve bought a new home, as only one property can qualify for PPRR at a time.

Also, if the departing spouse has transferred their interest to the other spouse but is entitled to a share of the sale proceeds later, the same tax treatment usually applies to those proceeds as to the original transfer. If the original transfer qualified for PPRR, that relief can carry forward.

Myth 4: Deferred sale proceeds are taxed twice 

It depends. The tax outcome hinges on how the settlement is structured and what kind of asset is involved.

Family home

In some cases, couples will agree, or the court will order that one parent can stay in the family home with the children, while the other moves out on divorce. 

The sale is delayed until a trigger event such as the youngest child finishing school.

As part of the financial settlement, the departing spouse will transfer their share of the home to the other, when the property is eventually sold, in return for:

• A fixed lump sum
• A percentage of the sale proceeds

If it’s a fixed sum, the departing spouse is treated as being owed a debt. They don’t own the family home and won’t pay CGT on their share of the sale proceeds. The spouse who owns the property pays any CGT due, but if it’s been their main residence, PPRR should apply.

If it’s a percentage of the sale proceeds, things get trickier. HMRC may treat the departing spouse’s share as a separate asset, meaning both spouses could face CGT. Section 225BA Taxation of Capital Gains Act 1992 can help the departing spouse claim PPRR but this only applies to family homes, not other assets. Early advice is essential.

Business assets

For assets like shares in a business, the tax position depends on how the settlement is structured and whether both spouses originally owned the asset.

Often these assets can’t be sold during divorce proceedings. Instead, the couple will agree that when the asset is sold in future, the selling spouse will pay the other:

• A fixed lump sum
• A share of the sale proceeds

If it’s a fixed sum, the recipient is treated as being owed a debt and won’t pay CGT. The selling spouse pays CGT on the full gain. 

Any transfer of the asset between spouses (usually from joint ownership to sole ownership) as part of the settlement should be covered by the no gain/no loss rules.

If it’s a percentage of the proceeds, the recipient may be treated as having a “chose in action” - a right to future money - which could be taxable. If the recipient never owned the asset being sold, there’s usually no CGT.

If they used to own the asset and transferred it to the selling spouse during the divorce, they may face CGT when they receive their share of the proceeds. HMRC treats the money as a capital sum derived from assets based on their prior ownership. 

Meanwhile, the selling spouse pays CGT on the full gain (subject to reliefs) but can’t deduct the payment made to the other spouse as an allowable expenditure. This can result in double taxation.

Myth 5: You only have until the end of the tax year of separation to transfer assets and avoid an immediate CGT charge

This used to be true but not anymore.

Before 6 April 2023, couples had until the end of the tax year of separation to transfer assets without triggering CGT. After that, transfers were taxed immediately even if the divorce wasn’t finalised. 

This was especially harsh for couples who separated late in the tax year and often led to couples rushing to try and agree transfers of assets prior to the end of the tax year of separation. The rules didn’t reflect the reality that financial settlements following a divorce can take months to negotiate and finalise.

Thankfully, the 2023 changes fixed this: 

• Couples now have up to three tax years after the year of separation to transfer assets on a no gain/no loss basis. However, this closes early if the couple obtain their final order of divorce before the end of that period.
• If a financial court order or formal agreement (such as a separation agreement) is in place, then there’s no time limit provided the transfer is pursuant to its terms.

Key takeaways

• Timing matters but less than it used to
• Structure is everything
• How the settlement is drafted affects tax outcomes
• Get advice early before finalising financial order

The 2023 changes were a win for fairness and flexibility but they don’t remove the need for careful planning. Tax advice should be part of the divorce process, not an afterthought.

More myths to bust?

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