Divorce Financial Settlement and Tax in 2026/27: CGT, Pensions and the Family Home

Quick answer

A UK divorce settlement is rarely "taxed" as a single event, but Capital Gains Tax, Stamp Duty Land Tax, pensions and Inheritance Tax all interact with how you divide assets. The key rule for 2026/27 is the no-gain/no-loss CGT window: spouses can transfer assets between themselves without an immediate CGT charge until the end of the third tax year after they stop living together, and indefinitely where the transfer is part of a formal divorce agreement. Get the timing and order of transfers right and most settlements complete with little or no tax.

Capital Gains Tax: the no-gain/no-loss window

CGT is the biggest trap in most divorces. While you live together, transfers of assets between spouses or civil partners happen on a no-gain/no-loss basis, meaning no CGT arises and the receiving partner inherits the original base cost. Reformed rules give separating couples a much longer runway: this treatment continues until the end of the third tax year after the year of permanent separation, and with no time limit at all if the transfer forms part of a formal divorce or dissolution agreement.

Miss that window with no agreement in place and transfers are treated as taking place at market value. With the annual exempt amount cut to just £3,000 for 2026/27, gains on second properties, shares or a business interest can quickly become taxable. Residential property gains are charged at 18% within the basic-rate band and 24% above it; other assets such as shares are taxed at the same 18% and 24% rates.

The family home and Private Residence Relief

Your main home is normally covered by Private Residence Relief, so a transfer or sale produces no CGT. The complication arises when one spouse moves out before the home is dealt with, because relief can be lost for periods after they leave. Special divorce provisions help: where the departing spouse later transfers their share to the spouse who stayed, or the property is sold under the settlement, relief can be preserved as if they had never left, provided they have not elected another property as their main residence.

If part of the sale proceeds will eventually come to the spouse who moved out (a deferred charge or "Mesher" style arrangement), an election can let them benefit from main-home treatment when the property is finally sold. Because the £3,000 annual exempt amount is so small, any slice of gain that falls outside relief is worth modelling before you sign.

Stamp Duty, LBTT and LTT on transferring the home

When one party transfers their share of the family home to the other under a court order or formal divorce agreement, the transfer is exempt from Stamp Duty Land Tax in England and Northern Ireland, even where the person keeping the home takes over the mortgage (which normally counts as chargeable consideration). Scotland's Land and Buildings Transaction Tax and Wales's Land Transaction Tax both provide equivalent reliefs for transfers on divorce or dissolution.

The sting comes later. If you keep a share in the former family home and then buy a new property, the 5% additional-property surcharge in England and Northern Ireland can apply, because you own more than one dwelling. There are limited exceptions, including where a court order prevents you disposing of your interest, so check your position before completing on a new purchase.

Pensions: often the largest asset

Pensions are frequently worth more than the house, and there are three main routes: a pension sharing order, a pension attachment (earmarking) order, or offsetting (one party keeps the pension, the other takes more of another asset). A pension sharing order splits a defined percentage of the pension into the other person's name. Crucially, the transfer itself is not a taxable event and does not use the recipient's annual allowance (£60,000 for 2026/27); tax only applies later when benefits are drawn, with up to 25% available tax-free subject to the lump sum cap of £268,275.

Offsetting needs care: £100,000 in a pension is not worth the same as £100,000 in cash, because pension income is taxable when drawn. Always compare like for like after tax.

Inheritance Tax, maintenance and your will

While married, transfers between spouses are exempt from Inheritance Tax without limit. Once decree absolute (final order) is granted you are no longer spouses, so that unlimited exemption ends. In practice, asset transfers under a divorce settlement are usually exempt as dispositions for the maintenance of family, so IHT rarely bites at settlement. The nil-rate band remains £325,000 and the residence nil-rate band £175,000 (tapering where the estate exceeds £2m), with the 40% rate above.

Divorce automatically revokes gifts and executor appointments to a former spouse in your will, treating them as having died before you - which can leave your estate passing somewhere you did not intend. Make a new will promptly. Spousal and child maintenance are paid from taxed income and are generally neither deductible for the payer nor taxable for the recipient. Child Benefit continues for the parent with care, but watch the High Income Child Benefit Charge, which claws back benefit on adjusted net income between £60,000 and £80,000.

Marriage Allowance and income changes

If one of you transferred £1,260 of Personal Allowance under Marriage Allowance (worth up to £252), you can keep it for the tax year in which you separate, but it must be cancelled afterwards - and you cannot start a fresh claim against an ex-spouse. After divorce your household income picture changes, which can affect tax credits, Universal Credit and the savings or dividend allowances you can use. It is worth recalculating your take-home position once the dust settles, especially if maintenance or a new job changes your band. The figures here apply across the UK, except where Scottish income tax bands and the devolved property taxes differ.