HMRC Tax Changes Affecting Divorcing Couples in 2025/26

A series of tax changes introduced between October 2024 and April 2026 has materially altered the financial landscape for divorcing couples. For solicitors handling financial remedy proceedings, these changes affect the real value of assets being divided, the timing of transfers, and the strength of arguments for retaining or disposing of business interests. For forensic accountants, they require more detailed tax modelling than at any point in recent years.

This article sets out the key changes, explains their interaction, and illustrates the practical impact through worked examples relevant to matrimonial finance cases.

The Changed Landscape

Three separate but interacting tax changes demand attention. The Autumn Budget 2024 increased Capital Gains Tax rates and began a staged increase in Business Asset Disposal Relief rates. The Autumn Budget 2025 (26 November 2025) confirmed the inherited tax Business Property Relief reforms proceeding from April 2026 and reduced Employee Ownership Trust CGT relief. Together, these changes affect how we value assets, model settlement outcomes, and advise on the timing of disposals in financial remedy proceedings.

None of these changes altered the rules for CGT on transfers between separating spouses, which were reformed in April 2023. But the 2023 rules become far more consequential when the rates they defer are higher. Getting the timing wrong is now more expensive than it was two years ago.

Capital Gains Tax Rate Increases

From 30 October 2024, the Autumn Budget unified CGT rates across all asset classes. The changes are significant for investment portfolios and business interests:

• Basic rate taxpayers: 18% on all gains (previously 10% on non-property assets, 18% on residential property)
• Higher rate taxpayers: 24% on all gains (previously 20% on non-property assets, 28% on residential property)
• Annual exempt amount: Frozen at GBP 3,000 per person for 2025/26

The residential property rates actually fell slightly (from 28% to 24% for higher rate taxpayers), but the rates on shares, business assets, and other investments rose substantially. For a higher rate taxpayer disposing of quoted shares, the effective rate increased by 20% (from 20% to 24%).

In the context of financial remedy proceedings, this means the latent CGT liability embedded in an asset portfolio has increased. When we prepare a schedule of assets for the court, we routinely calculate the "net of tax" value of each asset, reflecting the CGT that would crystallise on disposal. A portfolio of shares with GBP 500,000 of unrealised gains now carries a potential tax liability of GBP 120,000 at the higher rate (24%), compared to GBP 100,000 under the old rate (20%). That GBP 20,000 difference is money that neither party will receive, and the court must account for it when dividing the asset pool.

Business Asset Disposal Relief: The Staged Increases

Business Asset Disposal Relief (formerly Entrepreneurs' Relief) applies to the first GBP 1 million of qualifying gains on the disposal of a business or business assets. The relief has historically provided a significantly lower CGT rate, making it a critical factor in cases where a business must be sold to fund a divorce settlement.

The rate is increasing in two stages:

• 6 April 2025: BADR rate increased from 10% to 14%
• 6 April 2026: BADR rate increases further to 18%

The qualifying conditions remain unchanged: the individual must have held at least 5% of the shares and voting rights, been an officer or employee of the company, and held the shares for at least two years before disposal. The lifetime limit remains GBP 1 million.

For business valuations in financial remedy proceedings, the BADR rate directly affects the after-tax proceeds available for division. Consider a business valued at GBP 1.5 million with a base cost of GBP 200,000, yielding a gain of GBP 1.3 million. The first GBP 1 million of gains qualifies for BADR; the excess GBP 300,000 is taxed at the main rate.

Under the old 10% BADR rate with 20% main rate, the total CGT was GBP 160,000 (GBP 100,000 plus GBP 60,000). Under the 2025/26 rates of 14% BADR and 24% main rate, the total CGT is GBP 212,000 (GBP 140,000 plus GBP 72,000). From April 2026, at 18% BADR and 24% main rate, the total rises to GBP 252,000 (GBP 180,000 plus GBP 72,000).

The difference between the old and the 2026/27 position is GBP 92,000 in additional tax on the same transaction. That is a meaningful reduction in the net proceeds available for settlement.

IHT Business Property Relief: The April 2026 Overhaul

The change to Inheritance Tax Business Property Relief (BPR), confirmed in the Autumn Budget 2025 and taking effect from 6 April 2026, is the most structurally significant reform.

Previously, qualifying business property attracted 100% BPR with no upper limit. A family business valued at GBP 10 million passed on death with zero IHT exposure. This unlimited relief was a powerful argument in financial remedy cases for retaining business interests in the hands of the owner-spouse: "the business needs to stay with me for IHT planning purposes."

From April 2026:

• 100% BPR is capped at GBP 1 million per individual
• Business property above GBP 1 million qualifies for only 50% relief, giving an effective IHT rate of 20% on the excess
• The GBP 1 million allowance is transferable between spouses
• Payment of IHT on qualifying property can be made by equal, interest-free annual instalments over 10 years

The spousal transferability of the GBP 1 million BPR allowance creates an important consideration for divorcing couples. While married, a couple has a combined GBP 2 million BPR allowance. On divorce, each retains only their individual GBP 1 million. For a couple with a family business valued at GBP 3 million, the IHT position deteriorates on divorce: the owner-spouse faces IHT exposure on GBP 2 million of business value (GBP 3 million less GBP 1 million), with an effective IHT liability of GBP 400,000 on the excess at the 20% effective rate.

This has two practical effects in financial remedy proceedings. First, the "I need to keep the business for IHT reasons" argument is weakened. The IHT advantage of retention is now capped, and businesses above GBP 1 million face meaningful tax exposure regardless. Second, the forensic accountant's valuation report should address the IHT implications of business retention versus disposal, helping the court assess whether a clean break involving a business sale might produce a better overall outcome for both parties.

CGT Rules for Separating Couples

The 2023 reforms to CGT on transfers between separating spouses remain in force and become more consequential in light of the higher rates described above. Under TCGA 1992 s.58 as amended by Finance Act 2023:

• With a formal divorce agreement or court order: Transfers between spouses are treated as no gain/no loss with no time limit.
• Without a formal agreement: No gain/no loss treatment applies until the earlier of: (a) the end of the third tax year after the year of separation, or (b) the date of decree absolute or final order.

For a couple separating in July 2025, the no gain/no loss window runs until 5 April 2029 (three full tax years after 2025/26). Transfers pursuant to a court order qualify regardless of timing.

Additionally, a spouse who has left the former matrimonial home retains the ability to claim Principal Private Residence Relief on that property when it is transferred under a court order, regardless of when they moved out. This is a valuable protection that prevents a CGT charge crystallising on the home simply because one party left during the separation period.

The critical point is timing. Missing the three-year window where there is no court order triggers an immediate CGT charge at the new higher rates. For a property with GBP 300,000 of gains, the difference between a no gain/no loss transfer and a taxable disposal at 24% is GBP 72,000. Solicitors must factor in the separation date and the likely divorce timeline when advising on asset transfers.

Practical Examples

Example 1: Share portfolio transfer. A husband holds a portfolio of quoted shares acquired for GBP 200,000, now worth GBP 700,000. The unrealised gain is GBP 500,000. If transferred to the wife as part of a financial remedy order, no CGT arises (no gain/no loss transfer under a court order). If instead the shares are sold to fund a lump sum, CGT of GBP 120,000 crystallises at 24%, reducing the available proceeds to GBP 580,000. The choice between transferring the asset in specie and liquidating it to pay cash can make a material difference to the settlement.

Example 2: Business disposal with BADR. A wife owns 100% of a trading company valued at GBP 1.8 million with a base cost of GBP 100,000. Gain: GBP 1.7 million. If disposed of in 2025/26, BADR at 14% applies to the first GBP 1 million of gains (GBP 140,000 tax) and 24% applies to the remaining GBP 700,000 (GBP 168,000 tax). Total CGT: GBP 308,000. If disposal is delayed to 2026/27, BADR at 18% produces GBP 180,000 on the first GBP 1 million, plus GBP 168,000 on the excess. Total: GBP 348,000. Delaying one year costs an additional GBP 40,000 in tax. The forensic accountant's settlement model should present both scenarios to the court.

Example 3: BPR and business retention. A husband owns a family business valued at GBP 4 million. Pre-April 2026, 100% BPR applies with no cap: zero IHT on death. Post-April 2026, 100% BPR applies to the first GBP 1 million, and 50% relief applies to the remaining GBP 3 million. The effective IHT exposure on the excess is GBP 600,000 (GBP 3 million at the effective 20% rate). If the couple are still married, the transferable spousal allowance provides GBP 2 million of 100% BPR, reducing the exposure to GBP 400,000 on GBP 2 million. On divorce, the husband loses the transferred allowance. This affects the court's assessment of the real value of business retention and may influence whether a Wells v Wells clean break is more appropriate.

What Solicitors Should Do Now

Solicitors handling financial remedy proceedings should take the following practical steps in light of these changes.

Instruct the forensic accountant to model latent CGT at current rates. Every business valuation and asset schedule should include a net-of-tax column reflecting the embedded CGT liability at the applicable rate (14% or 18% BADR where qualifying, 24% otherwise). This is now standard practice, but the rates used must reflect the anticipated disposal date, not the historic rates.

Consider the timing of asset transfers carefully. Where a couple are separated but not yet divorced, confirm the separation date and calculate the no gain/no loss window. If the divorce is likely to take longer than three years from the end of the tax year of separation, ensure a court order is in place before any asset transfer to preserve no gain/no loss treatment.

Reassess business retention arguments. Where a party argues that a family business should not be sold, consider whether the BPR cap weakens their IHT argument. The forensic accountant can model the after-tax position of retention versus disposal under both the old and new BPR rules, giving the court a clear comparison.

Factor in BADR rate changes when modelling disposal timing. If a business sale is likely, the difference between disposal in 2025/26 (14% BADR) and 2026/27 (18% BADR) is quantifiable. The forensic accountant should present both scenarios, and the court timetable should be managed with this in mind where possible.

Review spousal BPR transferability. The transferable GBP 1 million BPR allowance is only available between spouses. On divorce, this benefit is permanently lost. In cases involving substantial business interests, this may be a relevant factor in the timing and structure of the settlement.

The cumulative effect of these tax changes is that settlement modelling has become more complex and the financial consequences of getting it wrong have increased. A forensic accountant who understands the interaction between CGT rates, BADR thresholds, BPR caps, and the no gain/no loss transfer rules is essential in any case involving significant assets.

If you need forensic accounting analysis of the tax implications of a divorce settlement, contact Jack Ross or call 0161 832 4451.

Last updated: March 2026

Frequently Asked Questions

How long do separating couples have to transfer assets without triggering CGT?

Transfers pursuant to a court order or formal divorce agreement qualify for no gain/no loss treatment with no time limit. Without a court order, the window runs until the earlier of: the end of the third tax year after the year of separation, or the date of decree absolute (final order). For a couple separating in July 2025, the window closes on 5 April 2029 absent a court order.

Does the Business Property Relief cap affect all businesses?

The GBP 1 million cap on 100% BPR applies from 6 April 2026 to all qualifying business property. Businesses valued up to GBP 1 million retain full IHT relief. The excess qualifies for only 50% relief, producing an effective IHT rate of 20% on the amount above GBP 1 million. The cap is per individual but is transferable between spouses, so a married couple has a combined GBP 2 million allowance. This transferability is lost on divorce.

Should a business be sold before April 2026 to benefit from the lower BADR rate?

The BADR rate increases from 14% to 18% on 6 April 2026 for qualifying disposals. Whether to accelerate a disposal depends on the specific circumstances: the gain, whether BADR qualifying conditions are met, the impact on the financial remedy proceedings, and whether the court timetable permits it. The forensic accountant should model both scenarios so the court and the parties can make an informed decision.

How does the forensic accountant account for CGT in a financial remedy asset schedule?

The forensic accountant calculates the embedded (latent) CGT on each asset by reference to the acquisition cost, the current value, and the applicable CGT rate. This produces a "net of tax" value that reflects what each party would actually receive if the asset were sold. The court uses these net figures when dividing the asset pool. Following the rate increases, this calculation has become more consequential as the tax amounts are larger.