When couples separate, the focus is often on who gets what โ the house, pensions, or savings. But whatโs often forgotten is that tax can take a big slice out of any deal. And one of the most significant taxes at stake is Capital Gains Tax (CGT).
I was reminded of this recently when a client, Helen, reached out.
She and her ex had been divorced for 15 years but still jointly owned the former family home. Theyโd finally agreed valuations, sorted their NHS pensions, and were ready to get everything sealed with a consent order. Then came the shocker:
Her ex had since bought another property. If he signed his share of the family home over to her now, the gain on his portion โ roughly ยฃ100,000 โ could trigger a CGT bill of ยฃ18,000โยฃ28,000 depending on his tax rate. He didnโt have the cash to cover it.
As Helen said:
โIf this isnโt a warning about the importance of sorting out finances at the point of divorce, I donโt know what is.โ
Why CGT Can Feel Unfair
One of the most surprising parts of CGT is that you can face a tax bill even if you donโt receive any money. HMRC treats a transfer between ex-spouses made outside the usual relief windows as if it happened at full market value, regardless of whether cash changes hands. So if one person โgiftsโ their share years after separation, HMRC can still treat it like a sale at todayโs value and tax the paper gain.
What is a โDryโ Tax Bill?
A dry tax bill is when you owe tax without receiving any cash from the transaction.
Example:
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The increase (gain) on a property share is ยฃ100,000.
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CGT is due at 18%โ28%, so ยฃ18,000โยฃ28,000.
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Because nothing was paid for the transfer, the person giving up the asset must fund the tax bill from elsewhere.
This is exactly why timing โ and the mechanism you use to transfer assets โ matters so much during divorce.
What is Capital Gains Tax?
Capital Gains Tax applies when you sell or transfer an asset that has increased in value. For residential property, the current rates are:
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18% for basic rate taxpayers
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28% for higher rate taxpayers
How CGT is calculated
CGT is charged on the gain (the increase in value), not the total property value. Legitimate costs such as purchase costs, certain improvement costs, and selling costs can reduce the taxable gain.
What counts as a disposal?
A โdisposalโ isnโt just a sale โ it can include gifting, transferring, or swapping an asset. Thatโs why divorce-related transfers can trigger CGT if handled at the wrong time or in the wrong way.
The CGT Rules on Divorce
Recent changes made things more generous, but the principle remains the same: timing is everything.
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Couples can transfer assets at โno gain, no lossโ for up to three tax years after the tax year of separation.
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After that, a transfer is treated as happening at market value, even if no money changes hands.
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Big exception: if transfers are made under a court-approved consent order, no gain/no loss treatment can apply without a time limit.
Why three years matters
Wait too long after separating and you risk losing reliefs, turning a simple tidy-up into an expensive tax event.
How consent orders protect you
A consent order doesnโt just make your agreement legally binding. It also ensures the transfer is recognised as part of a formal divorce settlement โ which can preserve no gain/no loss treatment and prevent a dry tax bill.
What About the Family Home?
The family home often benefits from Private Residence Relief, meaning no CGT when itโs sold. Complications arise if:
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One spouse moves out and keeps an interest in the home.
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The property is transferred years later, after theyโve bought another home.
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The sale happens more than nine months after moving out.
Does CGT apply if one spouse moves out?
If the property is sold within nine months of departure, main residence relief typically covers the gain. Beyond that, part of the gain may become taxable.
How Private Residence Relief works in divorce
Relief can extend where the staying spouse keeps living there and the sale/transfer is under a divorce settlement. Once the departing spouse buys a new main residence, choices about relief can get more complex.
What if the house is transferred, not sold?
A transfer of ownership (e.g., one spouse gives their share to the other) can still trigger CGT if it happens outside the relief window โ unless itโs done under a court order that secures no gain/no loss treatment.
How to Avoid a โDryโ Tax Bill
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Act within three tax years of separation. Transfers in this window typically qualify for no gain/no loss.
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Use a court-approved consent order. Even years later, orders can preserve relief and prevent market-value CGT charges.
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Plan the family home carefully. Consider sale vs. transfer timing, the nine-month rule, and how PRR applies if one party has moved out.
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Take specialist tax advice. Especially where thereโs a long gap since separation, multiple properties, or cross-border tax issues.
Why This Matters for Divorcing Couples
Helenโs story shows how failing to deal with finances at the time of divorce can come back to haunt you years later. Instead of a clean settlement, she and her ex now face a potential five-figure tax bill and fresh uncertainty about what to do with their home.
Itโs why I always say: a divorce without a consent order isnโt finished.
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A consent order makes your settlement legally binding.
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It protects against future claims.
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It ensures pension providers will act on a pension share.
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And, critically, it can save you from a CGT nightmare down the road.
Takeaway
If youโre divorcing, donโt leave your finances hanging. Acting early and getting a court-sealed consent order means you wonโt face nasty surprises years later.
At Easy Online Divorce, we help you secure a legally binding settlement quickly and affordably.
๐ Order Your Consent Order Here
๐ Or book a Free Consultation to talk through your situation.
FAQs on Capital Gains Tax and Divorce
Do you pay Capital Gains Tax on divorce settlements?
If transfers are made within three tax years of separation โ or under a court-approved consent order โ they are usually exempt from CGT. After that, transfers may trigger CGT if thereโs a gain.
Does the family home attract CGT?
If it has always been your main residence, usually no. But if one spouse moves out and years later sells or transfers their share, part of the gain may be taxable unless specific reliefs apply.
Whatโs the difference between the gain and the tax bill?
The gain is how much the asset has risen in value. The CGT bill is the tax percentage applied to that gain (typically 18%โ28% for residential property).
What if weโre already divorced but never did a consent order?
You can still apply for one, but the tax position may be very different if years have passed. Specialist tax advice is vital.
How can I avoid a CGT shock?
Act quickly, use a consent order, and plan the family home transfer/sale with the nine-month rule and PRR in mind.
