Navigating divorce: tax and pension considerations

Divorce or the dissolution of a civil partnership is often one of the most emotionally and financially complex events in a person’s life. For professionals supporting clients through this process, it is essential to understand the interplay between family law, taxation, pensions, and financial planning. 

Since the introduction of the Divorce, Dissolution and Separation Act 2020, the process of ending a marriage or civil partnership in England and Wales has become less adversarial. While this reform simplifies proceedings from a legal standpoint, it does not eliminate the financial complications that come with separation. In fact, such transitions often require intricate coordination between legal and financial advice. 

This article explores the key financial implications of divorce, with a focus on taxation and pensions, and outlines how collaborative engagement with a financial planner can add meaningful value for clients at this critical time.

Equal but not always simple 

Under current legislation, the starting point in dividing matrimonial assets is equality. However, this does not automatically mean a 50/50 split in all cases. Courts assess what is fair, taking into account the needs of both parties, particularly where children are involved. 

While equal division is more common now, this only applies where the assets exceed the housing and income needs of both individuals. In many cases, the courts still exercise significant discretion, meaning outcomes can be unpredictable. 

A key part of this is the division of the family home. Where children are involved, courts may use a Mesher order to delay the sale of the property. This allows the primary carer to remain in the home until a specified event—usually the children reaching adulthood. 

While Mesher orders are less common today, they are still used where an immediate sale would be impractical or unfair. However, they can complicate both financial planning and tax outcomes. 

Modelling future income and housing needs using cash flow forecasting helps provide a more realistic picture of what each party requires post-divorce. This can strengthen a client’s case in financial negotiations and enable solicitors to argue for settlements that are not only equitable but sustainable. Financial planners can also model scenarios showing the long-term impact of deferring a property sale, including the tax implications - particularly around capital gains tax (CGT) - and how this affects each party’s overall financial position. This is especially important where the property is placed in trust or subject to delayed disposal. 

Pensions and divorce 

Pensions often constitute one of the most significant assets within a marriage, yet they are sometimes overlooked or undervalued during settlement discussions. Under English law, pensions can be divided through: 

• Pension sharing orders, which allow for a clean break by transferring a portion of one party’s pension to the other. 
• Pension offsetting, where the value of a pension is offset against other assets (e.g. retaining the family home).
• Pension attachment orders, where one party receives income from the other’s pension at retirement. 

Each method has different implications for cash flow, tax, and long-term financial security. 

Understanding the real-world implications of pension division strategies requires expert input. A financial planner can compare the long-term impact of sharing versus offsetting and ensure clients appreciate how their retirement outlook is affected. In many cases, appropriate advice here can prevent costly mistakes and imbalances. 

Wills and estate planning 

Divorce does not invalidate a Will in England and Wales, but any gifts or appointments of the former spouse are treated as if that person had died on the date of the decree absolute. This can lead to unintended consequences if the Will is not promptly updated. 

There are also broader implications for estate planning. For example, inheritances received during divorce proceedings can affect financial settlements and may even be subject to claims from the former spouse.

Inheritance tax (IHT) and post-divorce gifts 

Although any assets passing between spouses and civil partners are exempt from IHT, the exemption ceases to apply once the divorce is final. However, some gifts made after divorce - such as for the maintenance of children or a dependent relative - may still be exempt under specific rules. 

Ensuring that any post-divorce financial arrangements are structured efficiently can avoid unnecessary IHT charges. Financial planners can help identify suitable exemptions and flag any planning opportunities. 

Capital gains tax: new rules bring more time and flexibility 

Prior to April 2023, spouses had until the end of the tax year of separation to transfer assets on a ‘no gain, no loss’ basis. This often created time pressure and led to adverse CGT outcomes. Fortunately, new rules introduced from 6 April 2023 provide a more generous window: 

• Spouses or civil partners now have up to three years after the tax year of separation to make ‘no gain, no loss’ transfers. 
• If transfers are part of a formal divorce agreement, there is no time limit. 
• Private Residence Relief (PRR) can be claimed on a later sale of the former matrimonial home, even if the transfer occurred earlier. 

These changes provide more flexibility and reduce the risk of inadvertent tax charges during what is already a challenging time.

Life policies and divorce

The assignment of life policies on divorce was historically considered a taxable event, but HMRC revised its view, confirming that no chargeable event arises where the transfer occurs under a court order. 

However, care is still needed. Changing the life assured could result in a policy losing its qualifying status, potentially triggering a tax charge or affecting future premium relief. 

The value of integrated advice

Divorce affects nearly every aspect of a person’s financial life - from day-to-day budgeting and tax efficiency, to long-term retirement planning and estate protection. For clients, navigating this complexity alone can be overwhelming. For solicitors and accountants, partnering with a financial planner can enhance the quality of service and improve client outcomes. 

At its core, financial planning during divorce is not just about technical compliance, it is about helping people rebuild their lives on a firm financial footing. Whether it is projecting future income needs, achieving pension fairness, or reducing tax exposure, the right advice at the right time can make all the difference.

If you would like to know more about the support we can offer clients during the divorce process, download a copy of our 7 Key Financial Planning Steps on Divorce or get in touch.

The Financial Conduct Authority does not regulate cash flow modelling, tax planning or estate planning.

The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction. The information is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.

The information in this article is correct as at 16/4/2025.