Do you pay tax on a divorce financial settlement in the UK?

Full answer

A divorce financial settlement is not a single taxable event - different elements are treated differently. Spousal maintenance and child maintenance payments are paid out of taxed income and are not taxable in the recipient's hands; there is no income tax deduction for the payer either. A capital lump sum is likewise not income and carries no income tax. The main tax risk is Capital Gains Tax on transferring chargeable assets such as a second property, shares or a business interest. Transfers between spouses are normally on a 'no gain/no loss' basis, meaning no CGT arises and the receiving spouse inherits the original base cost. Rules from 6 April 2023 extended this treatment so separating couples can transfer assets with no immediate CGT for up to three tax years after the year of permanent separation, or with no time limit where the transfer is part of a formal divorce agreement. Worked example: a couple separates and one transfers a buy-to-let worth GBP 300,000 (bought for GBP 200,000) within the protected window. No CGT is due on transfer; the recipient takes over the GBP 200,000 base cost and pays CGT only on a future sale. Outside the window, the GBP 100,000 gain could be taxed at 18% or 24% after the GBP 3,000 annual exempt amount. The family home usually attracts Private Residence Relief, and special rules protect the departing spouse's relief. Pension sharing orders are not taxed at the point of transfer - the receiving spouse simply holds the pension and is taxed on eventual withdrawal. 2026/27 detail: the CGT annual exempt amount is just GBP 3,000 and higher-rate CGT is 24%, so getting transfers inside the protected window matters. Use a capital gains tax calculator to model any asset transfer and take legal advice on timing.

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