1. Introduction: The Hidden Capital Gains Trap in Divorce
When a couple divorces or separates, the division of the family home is often emotionally charged. What is less obvious—but potentially disastrous—is the tax liability tied to splitting the home: notably Capital Gains Tax (CGT). Even when the home was once the family’s main residence, there are complex rules about who pays CGT, how much and when — and failing to plan properly can leave one or both parties facing a large tax bill in 2026.
This article unpacks the rules, the reliefs, the timing traps and the practical steps couples should take to avoid unexpected tax liability.
2. Why the Family Home Isn’t Automatically CGT-Free on Divorce
2.1 Private Residence Relief (PRR) Basics
When a property qualifies as an individual’s “main residence,” Private Residence Relief (PRR) can exempt all or part of the gain on disposal from CGT. However:
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The relief applies to the individual owner, not automatically to both spouses.
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The relief only covers the periods during which each person occupied the property as their main home, plus an automatic final period (usually 9 months).
Thus, if one spouse moves out or the property becomes let before disposal, that spouse may lose part of the relief.
2.2 Transfers Between Spouses and the “No Gain/No Loss” Rule
Transfers of assets between spouses and civil partners while living together are treated as no gain/no loss — meaning no CGT arises at the time of transfer.
When separation occurs, for transfers made within certain time-windows, no gain/no loss treatment may remain available.
Importantly: If transfer is made after the time window expires, the base cost for the recipient may be the market value at transfer, leading to higher CGT when sold.
3. Key Rule Changes & Time-Limits to Watch (2023-2026)
Here are the critical updates to the CGT rules for divorcing/separating couples:
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For disposals on or after 6 April 2023, the couple is allowed up to three tax years after the tax year in which they cease living together to make transfers on a no gain/no loss basis.
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If the transfer occurs under a formal divorce or dissolution agreement (such as a consent order), the no gain/no loss treatment may apply indefinitely.
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When one spouse retains an interest in the former matrimonial home, recent changes allow that spouse an option to claim PRR, provided certain conditions hold.
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Between 2025-26 and beyond, CGT rates on residential property gains remain a pressing concern (e.g., 18%/24% for basic/higher rate taxpayers) so timing is ever more important.
4. Who Pays CGT? The Answer Depends on Several Factors
4.1 Ownership Structure and Transfer Timing
If the home is transferred between spouses while still married/partners and living together – no immediate CGT arises (via no gain/no loss).
If the transfer occurs after separation, the time-limit rules apply (see above). If the transfer misses the window, the transferring spouse may face a CGT charge based on market value at the date of transfer.
4.2 Sale vs Transfer
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Transfer to the ex-spouse: May qualify as no gain/no loss if within the window/formal agreement.
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Sale to a third party: The former home may trigger CGT for the owner disposing. The liability falls on whichever individual owns the asset being disposed of.
4.3 Division of Proceeds & Retained Interest
In some settlements one spouse retains a deferred interest (for example via a Mesher-order or deferred charge) in the property. Recent changes allow that retaining spouse to claim relief on their share of a future sale if certain conditions are met.
4.4 Impact of Private Residence Relief
If spouse A lived in the home as main residence for 10 years, then moved out and spouse B stayed, then the timing and residence periods affect who gets how much PRR. If spouse A transfers their share to spouse B under a formal agreement, spouse A may retain PRR on their share even though not resident. But if they buy a new main residence and nominate it, PRR may be lost.
5. Example Scenarios: Putting the Rules into Practice
Scenario A: Transfer Within Three-Year Window
John and Jane separate on 1 May 2024. They own the family home jointly. John transfers his 50% share to Jane in March 2027 (within 3 tax years).
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CGT: No gain/no loss arises on transfer.
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Jane now owns 100%. If she eventually sells, gain is calculated from original cost.
Result: Tax liability deferred, and husband avoids a lump CGT hit.
Scenario B: Missed the Window, No Formal Agreement
Mark and Lucy separate in June 2023. They delay and Mark transfers his share to Lucy in June 2027 without formal order.
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Because transfer occurred after three tax years, market value at transfer applies.
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Mark’s gain = market value minus original cost.
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Lucy inherits a higher base cost (market value) → smaller future gain but Mark pays a large CGT now.
Scenario C: Retained Interest & PRR Claim
Anna and Ben divorce in 2025. Ben retains interest in the home through a deferred charge order but lives elsewhere. Anna continues living in the home with kids.
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Under new relief, Ben may still claim PRR on his share when the property is later sold — if Anna has kept it as her main home and Ben hasn’t nominated another.
This planning allows Ben to benefit despite not occupying the property.
6. 2026 Risks: What Separating Couples Often Miss
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Assuming automatic PRR: Many expect that because the home was “family home,” PRR covers everything. It doesn’t automatically cover both spouses’ entire gain.
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Ignoring the 3-year deadline: Transfers after the window or without formal order lose the no gain/no loss shield.
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Not documenting a formal agreement: Without a consent order or clear legal document, relief may be lost.
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Nominating a new main residence too soon: If a departing spouse buys a new main home and claims it, they may lose PRR on their share of the former home.
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Dry tax charges: A spouse transfers an asset without receiving proceeds but is still liable for CGT if transfer falls outside relief windows.
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Assuming “common law” spouse benefit: Only legally married couples or civil partners benefit from spouse/civil partner reliefs — cohabiting couples do not.
7. Step-by-Step Practical Checklist for 2026 Settlements
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Establish date of separation — determine tax year when living together ceased.
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Decide which spouse holds which asset — who stays in the home, who transfers out.
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Consider timing — aim to transfer within three tax years if no formal order; prefer formal order for unlimited relief.
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Document legally — ensure consent order or property transfer deed is properly executed.
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Nominations — each spouse can nominate a main residence for PRR but must be careful to avoid conflict.
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Calculate base costs — the recipient spouse inherits original base cost (if relief) or market value (if not).
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Report & tax pay — if property sold, CGT must be reported (often within 60 days for UK residential property).
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Seek expert advice — given complexity, liaise with specialists before finalising financial settlement.
8. Why Professional Advice Is Essential
The interaction of family, property, and tax law is intricate. Mistiming a transfer by days, failing to secure a formal agreement, or misunderstanding PRR elections can lead to large unexpected tax bills. This is why many couples engage expert advisers such as My Tax Accountant to guide them through the settlement, ensure reliefs are correctly claimed, and tax liability minimised.
9. Conclusion: Don’t Let CGT Be the Divorce Surprise
In the upheaval of separation or divorce, tax may be the last thing on a couple’s mind—but it shouldn’t be. CGT on the family home is one of the biggest financial bombs many couples never see coming.
By understanding the rules, acting within the time-limits, and securing proper legal structure and tax advice, couples can protect wealth, avoid unwanted liability, and ensure the split of the home doesn’t become a tax trap.
In short: get the timing right, document it properly, and treat the tax as part of the settlement—not an after-thought.
