When the breakdown of a marriage occurs, tax considerations are likely to be the last thing on the parties’ minds.

However, the potential benefits which can arise from tax planning cannot be ignored, especially where it can be demonstrated that both of the parties concerned may benefit.


Transfers between spouses

Section 58 of Taxation of Chargeable Gains Act 1992 (TCGA92) provides that transfers of assets in a tax year, between spouses or civil partners who are ‘living together’ in any part of the tax year, are regarded as being made on a ‘no gain/no loss’ basis.

What this means is that the person receiving the asset is treated as if he/she has paid an amount equal to the total of its original costs.


Transfers between spouses in the year of separation

The ‘no gain/no loss’ treatment continues to apply to transfers between spouses or civil partners throughout the whole of the tax year in which separation takes place, even though the spouses or civil partners may not be ‘living together’ at the time of transfer.

If a divorce or dissolution of a civil partnership takes place in the same tax year as separation, the ‘no gain/no loss’ treatment applies to transfers of assets made after that divorce or dissolution, but before the end of the tax year.

The definition of ‘living together’ is given in ICTA 1988/s 282. A woman is treated as ‘living together’ with her husband unless she is:

  1. separated under a court order,
  2. separated by a formal deed of separation, or
  3. separated in such circumstances that the separation is likely to be permanent.

A couple may be separated even when they are still living in the same house (Holmes v Mitchell STC 25), for example, because financial considerations make alternative accommodation unavailable for one spouse or civil partner, or where the parties want to minimise the initial impact of the separation on their children.


Transfers between spouses after the end of the tax year of separation

Where a transfer occurs between spouses or civil partners after the end of the tax year in which they stop ‘living together’, the rules to decide the date of disposal and the amount of consideration on disposal are as follows:

(a) Date of disposal

For transfers made as part of a divorce agreement, the date of disposal for capital gains tax purposes is the date of the agreement.

If transfers take place following a court order, the date of disposal for capital gains tax purposes is the date of the court order, unless the court order precedes the date of the decree absolute, in which case the date of the decree absolute is the effective date.


(b) Amount of consideration

Transactions between a husband and wife (or civil partners) after the tax year of separation cannot take place at ‘no gain/no loss’, as section 58 of TCGA 1992 is no longer applicable.

Furthermore, a husband and wife (or civil partners) are connected persons by virtue of TCGA92/s286(2). This is so even if they are permanently separated, and it remains the case until the date of the decree absolute which ends their marriage.

Section 18(2) of TCGA 92 provides that transactions between connected parties are always treated as transactions otherwise than by way of a bargain made at arm’s length.

TCGA92/s17(1)(a) provides that where a transaction takes place which is otherwise than by way of a bargain made at arm’s length, the consideration for the disposal of an asset is deemed to be equal to the market value of that asset at the date of disposal.

Accordingly, in general, the transfer of an asset between a husband and wife or between civil partners of each other, who are permanently separated, is treated as taking place for consideration equal to the market value of the asset transferred on the date of the disposal. More information

The market value rule can extend beyond the date of the decree absolute where a disposal is not made by way of a bargain at arm’s length. For example, a disposal under a court order would not be a bargain at arm’s length and therefore requires the substitution of market value.

After the decree absolute or dissolution, the former spouses or civil partners cease to be connected persons (unless they are connected for other reasons, for example, because they are business partners) and, accordingly, transactions between them take place at the value placed by both parties.


Matrimonial or civil partnership home

Where a property has qualified for private residence relief and one party to the marriage moves out, it is possible to make a claim to enable the property to continue to be treated as that individual’s only or main residence until disposal to the remaining spouse where all of the following three conditions are met:

  1. The disposal is pursuant to:
    * an agreement with the spouse or civil partner made in contemplation of the dissolution or annulment of the marriage or civil partnership; or
    * a separation order; or
    * that the separation is likely to be permanent; or
    * by order of a court, a decree of divorce, nullity or dissolution is granted.
  1. The dwelling house (or part of) continued to be the main residence of the individual’s spouse or partner.
  1. The individual seeking the relief has not provided notice that another residence is to be treated as their main residence.

This is a very useful relief provided by s225B TCGA 1992 and can often come in handy in situations for example where the spouse moving out is renting a property and is therefore not concerned about loss of relief on that residence.

However, if the departing spouse or civil partner acquires another property, he/she will not obtain private residence relief (PPR) on his/her other property for the period that the matrimonial or civil partnership home is deemed to be his/her principal residence. Therefore, a cost/benefit analysis should be undertaken before deciding whether or not it is in the departing spouse’s or civil partner’s interest to apply the concession.

Please note that certain periods of non-occupancy are deemed periods of occupancy, for example:

  • the last nine months of ownership (where the disposal takes place on or after 6 April 2020; previously it was 18 months)
  • an absence not exceeding three years for overseas employment
  • an absence not exceeding four years where the individual was prevented from residing by virtue of the place of work
  • an absence no exceeding four years where a spouse was prevented from residing by virtue of the other spouse’s place of work.


Mesher orders

An order by the court that a spouse or civil partner holding an interest in the matrimonial or civil partnership home should hold it on trust for a limited period, for example, until the 18th birthday of their youngest child, and entitling the other spouse or civil partner to occupy the home for the trust period, is often referred to as a Mesher Order.

A Mesher order allows the sale of the family home to be deferred for a certain length of time or until a specific event takes place.

The effect of an order or agreement is that one spouse/partner’s interest in the property is transferred to a trust at the date of that order or agreement. The trustee will normally be the spouse who holds the interest subject to that settlement. The transfer is treated as a disposal (at market value) of the whole asset that becomes the property of the trust. Provided the property meets the conditions for a private residence, the gain on the creation of the settlement should be exempt by private residence relief. The other spouse or civil partner may then occupy the property under the terms of the trust.

When the deferred period ends, the spouse holding the interest in the property subject to the trust will generally become the outright owner. There will be a deemed disposal at that time. So long as the property has been occupied as the only or main residence of the spouse entitled to occupy it, the trustee will benefit from private residence relief for the trust period.

The non-occupying spouse reacquires the share in the property at its current market value and this value is taken into account when calculating a gain on a subsequent disposal.


Other issues

Another issue to be aware of when dealing with clients going through a divorce relates to court orders governing post-divorce asset realisations. See HMRC’s guidance on the issue.

The guidance provides that if the court instructs one party to hand over a certain percentage of the proceeds on a sale of an asset to the other party, the person receiving the proceeds is not chargeable to capital gains tax on the amount received.

This is because it represents financial provision by order of the court, and is not a sum received in consideration for the disposal of an asset.

The guidance also states that the party making the payment is not entitled to a deduction for the amount paid to the other party, because the sum is an allocation of the proceeds and not a deduction in arriving at the gain.



In conclusion, no capital gains tax is payable on transfers between spouses or civil partners in a tax year in which they are living together. This includes the year in which they separate.

Where a transfer takes place after the year of separation, capital gains tax may be payable. The transfer is normally treated as being made at market value, because the spouses are still connected persons until the decree absolute.

Ideally, transfers of chargeable assets between the parties should therefore take place before the end of the tax year in which separation occurs.

Where a transfer of assets could give rise to a capital gains tax liability, making the transfer in different tax years may reduce the total bill by taking advantage of two annual exemptions. If the transferor spouse’s or civil partner’s capital gains tax rate is likely to be lower in one tax year than another, accelerating, or delaying, a transfer of assets could improve their capital gains tax position.

Finally, do not forget the useful relief contained in s225B TCGA 1992.

This article has been shared from ACCA In Practice, to whom copyright belongs.  Whitefield Tax are an ACCA Member Firm