Separation and divorce – capital gains tax (CGT) planning

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Separation and divorce is never an easy issue to manage, however, it is important to consider the tax implications in such circumstances.

Separation – the loss of the no gain/no loss treatment

Assets transferred between spouses living together¹ at some time in a tax year take place at ‘no gain/no loss’ i.e. no CGT liability arises.  In years up to and including the tax year of permanent separation, the no gain/no loss rules automatically apply.  Thereafter, for tax years following the year of separation, up to the point at which Decree Absolute is pronounced, whilst the connected party rules continue to apply (see below), such transactions are not considered to take place at ‘no gain/no loss’.  It is vital that couples considering divorce are aware of this so that they can manage any transfers that need to take place without triggering a CGT charge.

¹ spouses are treated as living together unless they are separated under a court order, by a formal Deed of Separation or in such circumstances that the separation is likely to be permanent  

Separation – connected persons rule

Spouses are treated as ‘connected persons’ for CGT purposes. This continues to be the case throughout a period of separation and divorce proceedings until Decree Absolute is pronounced.  Generally speaking, transactions between connected parties are treated as made at market value.  As mentioned above, the availability of the ‘no gain/no loss’ advantage is only for the tax year of separation. 

Transfers after the divorce is absolute

As discussed, until such time as the Decree Absolute is pronounced, the respective parties are ‘connected’ for CGT purposes. Special rules apply where a loss arises on assets transferred to a recipient spouse following the tax year of separation but prior to the Decree Absolute.  Such losses (‘clogged losses’) may only be offset against chargeable gains arising from transfers to the recipient spouse whilst they remain connected to the transferor i.e. BEFORE pronouncement of Decree Absolute.  A review of the overall position should be taken to ensure that the overall CGT burden is minimised, by balancing the assets to be transferred at a gain with assets to be transferred at a loss, plus allowing the transferor to utilise any clogged losses as far as possible. 

Once the divorce is absolute, the couple are no longer connected persons and any transactions between them are regarded as being on an arm’s length basis. Any unutilised clogged losses will disappear at this stage.

PPR relief – separating couples

A husband and wife can only have one principle private residence (PPR) at a time, which can be an issue on divorce or where there is a separation. In situations involving separation, you lose the advantage of the no gain/no loss rules (unless the transfer is in the year of separation until the divorce becomes final).  Therefore, separating couples may rely upon the PPR provisions in order to avoid a CGT charge.

Assuming a dwelling has been the only/main residence throughout ownership, on one party moving out of the matrimonial home on separation, in order for any capital gain on a transfer to the party retaining the property to be fully exempted from CGT under the PPR relief provisions, the transfer must take place within 18 months (the final period).

If the period between moving out of the matrimonial home and the transfer is longer than the final period exemption, the gain will not qualify for full PPR relief. So a charge to CGT could arise at a time when funds are least likely to be available. The charge can, however, be mitigated in appropriate cases (by TCGA92/S225B).

TCGA92/S225B allows the former matrimonial home to be treated as the only or main residence of the transferring spouse from the date his or her occupation ceased until the earlier of (1) the date of transfer and (2) the date on which the property ceases to be the only or main residence of the spouse to whom the property is transferred.

If the transferring spouse has acquired another residence, it may be disadvantageous for a claim to be made for TCGA/S225B to apply. You can only allow relief on one residence for the same period and if relief is given on the former matrimonial home it will be lost on the other residence.

This commentary focuses solely on the CGT implications of property transactions on separation and divorce. IT, IHT and SDLT are not referred to, but should be considered.


Whilst the information provided above is believed to be true, it is provided without acceptance by Ward Williams and/or Simon Boxall of any responsibility whatsoever, and any use you wish to make of the information is therefore, entirely at your own risk.


About the author

Simon is the Tax Director at Ward Williams and has more than 20 years of practical experience working in the tax profession.


Specialising in personal tax, Simon qualified as a Tax Technician in 2007, having been awarded with the Ivison medal for attaining the highest mark in the Personal Taxation paper in 2006.


As department head, Simon oversees the tax team across the Ward Williams group, whilst managing a diverse portfolio of clients including high net worth individuals, doctors, directors of owner managed businesses, partnerships and sole traders.

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