Divorce and Tax

Why a Divorce Settlement Might Need a Calculator and a Crystal Ball

Getting divorced is, of course, an incredibly stressful time for people.

As well as the obvious emotional turmoil, divorce often involves dividing homes, businesses, pensions, and investments.

The challenge from a tax point of view is that each asset has its own (income and) capital gains tax rules, so that without proper tax advice, what looks like a “fair” 50:50 split can turn into an unbalanced arrangement once HMRC takes its share.

Whilst some cases are more straightforward than others, it’s important for those getting divorced and their professional advisers to recognise those situations which are likely to lead to more tax complexity.

As such, we thought it would be useful to highlight some of the more regular challenges we come across when advising divorcing couples and indeed more generally in relation to capital gains tax advisory work.

Property Gains Aren’t Always Straightforward

• Principal Private Residence (PPR) relief may only be partial if the property wasn’t always your main home.
• Historic improvements, mixed-use properties, or part disposals can require a more “forensic” analysis to get the numbers right.
• If the property was acquired in an unusual way, for example, it was inherited or gifted, or previously owned by a company or a trust, this may make things more ‘interesting’ from a tax point of view
• What if the property is some development land which is subject to an overage agreement or some contingent consideration? How should that land be valued, and what CGT will apply on the deferred element of consideration?

Businesses Need More Than a Valuation

• The value of the business is one thing; the after-tax value is another.
• Reliefs like Business Asset Disposal Relief (BADR) need checking
• Dividends, director loans, or asset extractions can create extra tax liabilities post-settlement.

Investments Aren’t All Equal

• Some assets are easy to split, others come with hidden tax ‘baggage’.
• Offshore funds can trigger higher tax rates if they lack “reporting fund” status.
• Cryptoassets bring extra complexity, including record-keeping headaches, valuation debates, and questions about the CGT treatment of certain transactions.
• Different investment types produce different after-tax incomes. It may be obvious; but £1m in cash is not the same as £1m in a high-yield portfolio or a bond from a tax perspective.

Pensions and Deferred Assets Can Bite Later

• Lifetime Allowance charges may still apply in some situations.
• QROPS, SIPPs, and overseas schemes have complex rules that can affect both valuation and future tax bills.
• The way pensions are divided (offsetting vs sharing) can have radically different tax consequences.

Cross-Border, Residence and Domicile Complications

• What if two different countries’ are “fighting” over who gets to tax the gain?
• ‘Domicile’ status can completely change the inheritance tax and CGT picture.
• Offshore trusts and companies need careful unwinding, otherwise, you can accidentally trigger taxes in multiple jurisdictions.

Historic poor management and/or Tax Disputes and Investigations

• You may need help identifying and quantifying undeclared or misreported liabilities or matters involving HMRC enquiries.
• It might be necessary to reconstruct historic tax positions where records are incomplete or complex.

Conclusion

Divorce is hard enough without a tax bill you didn’t see coming. The earlier a tax specialist is brought in, the more likely the settlement will be truly fair, not just before tax, but after it. If you need help with any aspect of your or your client’s divorce or in relation to capital gains tax advice more generally, please do get in touch.