Divorce and separation can be emotionally and financially complex, and for many, one key concern is whether Capital Gains Tax (CGT) will apply when assets are divided.

While transfers between spouses and civil partners are generally free of CGT thanks to the spousal exemption, this can change once a couple separates. Knowing when the exemption applies, how property sales are treated, and what reliefs may be available can help you make informed decisions and potentially reduce your tax liability.

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Spousal Exemption Rules

When spouses or civil partners transfer assets between each other, those transfers are normally exempt from CGT, provided they are “living together” in that tax year.

This exemption only applied until the end of the tax year in which the couple separated. However, from 6 April 2023, the government extended the CGT rules to allow more time for tax-free asset transfers during divorce or dissolution.

Rules that came in from April 2023

Under current legislation (as of 2026), separating couples have:

• Up to 3 tax years after the tax year of separation to transfer assets between themselves without triggering CGT.
• Unlimited time to transfer assets between themselves without CGT if the transfers are made under a formal divorce or dissolution agreement (such as a court order or consent order).

This applies to both divorcing spouses and civil partners ending a civil partnership.

This change provided much-needed breathing room for separating couples and their advisers to arrange a fair settlement without being rushed by tax deadlines.

How Capital Gains Tax is calculated after separation

Once the exemption window has passed, any transfers of assets between the former spouses or civil partners may be treated as gifts for CGT purposes, meaning the person transferring the asset may be liable for tax based on market value.

Each individual is responsible for their own gains and losses and is taxed accordingly. This means CGT can be different for each party, depending on the assets they receive and their overall tax situation.

You may also be able to use your annual CGT exemption, which as of the 2025/26 tax year is £3,000 per person (note: this amount has been reduced significantly in recent years).

Capital Gains Tax and the family home

The family home (principal private residence) often forms a significant part of a divorce settlement, and its tax treatment deserves careful attention.

Principal Private Residence Relief (PPR)

If the property has been your main residence for the entire period of ownership, you’ll typically qualify for full Principal Private Residence Relief, which exempts the gain from CGT.

However, complications can arise when one spouse moves out before the home is sold or transferred or the property is retained jointly for a period after separation.

Key points for the marital home

• The spouse who remains in the property can usually claim full PPR.
• The spouse who moves out may still claim full PPR if the home is sold or transferred to the other spouse within 3 years of moving out.
• If the property is transferred under a formal divorce agreement, the departing spouse can continue to claim PPR indefinitely, provided certain conditions are met.

Conditions for extended PPR relief

To benefit from this continued relief beyond the 3-year window, the following must apply:

1. The property is transferred to the spouse who continues to occupy it as their main home.
2. The transfer is made as part of a formal divorce or dissolution agreement (e.g. court or consent order).
3. The transferring spouse has not elected another main residence during this time.

This ensures that individuals aren’t penalised with CGT simply for leaving the marital home as part of a fair settlement.

Can you avoid Capital Gains Tax on divorce?

It’s possible to minimise or avoid CGT when divorcing, with careful planning and timing. Here are some tips:

• Use the spousal exemption window effectively, now up to three tax years, or indefinitely with a court order.
• Make use of each person’s annual CGT exemption.
• Consider how to divide assets in a way that balances gains and losses between you.
• Where possible, structure transfers under a formal divorce agreement to extend tax reliefs.
• If selling the family home, check your eligibility for Principal Private Residence Relief.

It’s also important to consider how timing your separation may impact tax planning. For example, separating in April gives nearly a full tax year to plan CGT-efficient transfers, whereas separating late in the tax year (e.g. March) shortens the timeline.

Other considerations include, if the property is larger than 0.5 hectares (about 1.2 acres), only the main house and permitted garden may qualify for full PPR. Also, if you or your ex-spouse move abroad, non-resident CGT rules may apply. 

Lastly, CGT planning should be integrated with broader financial and legal advice as part of your settlement.

How we can help

Changes to rules mean that paying Capital Gains Tax on divorce or separation offers greater flexibility and relief, especially when transfers are made under formal agreements. However, by understanding the updated rules around spousal exemptions, PPR, and settlement structuring, it’s possible to minimise or even avoid CGT exposure during a divorce.

If you’re navigating separation and unsure of your tax position, it’s a good idea to speak with a qualified financial planner or tax adviser.

If you need advice on financial planning during divorce, arrange a free consultation to discuss your situation and get tailored guidance.

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This article is intended for general information only, it does not constitute individual advice or legal decisions and should not be used to inform financial decisions.

The information contained within this article 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 Financial Conduct Authority (FCA) does not regulate estate planning, tax, or trust advice.

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When it comes to inheritance tax (IHT) planning, most people naturally want to preserve as much of their wealth as possible for their family and loved ones. And rightly so, after a lifetime of hard work, you want to pass on your legacy, not lose a large portion of it to the taxman.

But the reality is without proper planning, even modest estates can face significant IHT bills. One common, and costly mistake is gifting your home while continuing to live in it. This may fall foul of the IHT rules, known as a “gift with reservation of benefit” and it’s a trap that catches out well-meaning families.

Let’s break it down. 

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What is a gift with reservation?

Put simply, a gift with reservation happens when you give something away but still keep some benefit from it.

The classic example? Parents transferring their main residence to their children but continuing to live there rent-free. While this may seem like a clever way to reduce the value of your estate, HMRC doesn’t see it as a true gift, and they’ll treat it as though you never gave the property away at all.

As one judge famously put it: ‘not only may you not have your cake and eat it, but if you eat more than a few de minimis crumbs of what was given, you are deemed for tax purposes to have eaten the lot.’

How do they affect inheritance tax liability?

Under current rules, if a gift is deemed to include a reservation of benefit, the full value of that gift is pulled back into your estate for IHT purposes, no matter how long ago it was made.

That means the usual 7-year rule (where gifts fall outside your estate after 7 years) doesn’t apply. Instead, the asset could still be taxed at up to 40% on your death.

Compare that with a genuine gift:

If you give away an asset to an individual and retain no benefit, and survive seven years, the gift is likely to be completely outside your estate. These are called Potentially Exempt Transfers (PETs). 

How it works in practice

Let’s say in 2025, John gifts his £600,000 home to his daughter but continues living there rent-free. He passes away in 2032.

Even though seven years have passed, HMRC will treat the house as still being part of his estate, because he kept living there without paying rent. That could mean a £240,000 tax bill (40% of £600,000) on the home alone.

Now imagine John had paid full market rent from the start. In that case, the gift would be considered a genuine PET. Provided he lives for seven years, no inheritance tax would be due on the property. 

How can you gift the family home, properly?

If you’re thinking of passing on your home but still want to live there, you must pay full market rent to avoid it being a gift with reservation. That rent should be backed up with a formal agreement and reviewed regularly to reflect market rates. 

There’s a silver lining here: paying rent can actually help reduce your taxable estate by reducing your cash reserves. But of course, the rent becomes taxable income for your children, so this needs to be factored in.

Holiday homes count too: if you gift one but still use it occasionally, you should pay market rent for each use, or HMRC may challenge it. 

What about Capital Gains Tax (CGT)? 

Gifting an asset, especially one that has increased in value, can also trigger Capital Gains Tax (CGT), which adds another layer of tax complexity.

• If the property is your main residence, CGT usually isn’t payable when you gift it.
• If it’s a second home or investment property, CGT could apply on the gain at the point of gifting.

Here’s a twist: if you hold onto the property and pass it on when you die, your heirs benefit from a Capital Gains Tax uplift, the property is revalued at the date of death, which can significantly reduce CGT if they sell it later.

But if you make a gift with reservation, your estate may still be taxed as if you owned the asset, but your heirs won’t benefit from that CGT uplift. It’s the worst of both worlds. 

Moving into care – does that change things?

If you’ve gifted your home but still live in it rent-free, it’s a gift with reservation.

However, if you later move permanently into a care home, you no longer benefit from the property. From that point, the 7-year PET clock starts.

But here’s the catch: research from the Office for National Statistics (ONS) showed the average stay in a care home is between 2 to 7 years, so it’s statistically unlikely that moving into care will make the gift effective for inheritance tax planning, unless you move fairly soon after the gift.

On the other hand, if you were paying market rent from the beginning, your 7-year clock already started when the gift was made, and moving into care has no impact on the IHT position.

⚠️ Note: Gifting your home to avoid paying for care fees could be seen as deliberate deprivation of assets. Local authorities can investigate this and may still assess you as owning the property. 

2025/26 Inheritance tax thresholds recap

Nil-Rate Band: £325,000 – the standard IHT-free allowance, frozen until 2031.

Residence Nil-Rate Band (RNRB): £175,000 – available if you leave your home to direct descendants (children, grandchildren, etc.). Starts tapering once your estate exceeds £2 million.

Married couples and civil partners can combine allowances. That means a couple could potentially pass on up to £1 million tax-free if they qualify for both the nil-rate and residence nil-rate bands. 

Why the residence nil-rate band changes the game

Since the introduction of the RNRB, fewer people need to gift their home to their children during their lifetime. That’s because doing so could mean losing access to this valuable allowance.

By retaining your home and planning more strategically with your liquid assets, such as cash or investments, you may be able to reduce your IHT exposure without falling into the gift with reservation trap.

For example, making gifts from surplus income or investment portfolios, and retaining the family home to benefit from the RNRB, is often a more effective strategy. 

How we can help

Estate planning is complex, and what works for one person may not be right for another. Gifting your home might seem like a smart move at first glance, but without careful planning, it could land your estate with an unexpected tax bill.

If you’re considering giving away your property or want to understand your options for reducing inheritance tax, it’s crucial to get professional advice early.

If you’d like help navigating the latest inheritance tax rules and exploring the best options for your estate, we’re here to help. Book your free initial consultation with one of our advisers today and start your planning with confidence. 

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The Financial Conduct Authority (FCA) does not regulate cash flow planning, estate planning, tax or trust advice. 

This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions. 

Inheritance tax (IHT) is a tax levied on an estate before the assets are passed to the beneficiary via inheritance or as a gift. Although IHT is paid on death, it can also apply to some gifts that are made before the person dies. If you’re making a financial gift, you need to understand whether the gift is tax-free, or whether it will create a tax bill, either immediately or further down the line. That’s why it’s critical to understand the 7 year gift rule in inheritance tax.

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Introduction to inheritance tax 

Before we explain the 7 year gift rule in inheritance tax, it’s important to provide a basic overview of what we mean by the term “inheritance tax”. 

Simply put, inheritance tax is a tax on the estate (i.e. money, possessions, property) of a person who has died. It's a one-off tax that must normally be paid within 6 months of the deceased's death (exceptions may apply). IHT is also referred to as a cumulative tax because it takes into account earlier gifts when assessing the amount of tax that is due. 

Currently, the nil-rate band (i.e. tax threshold) for inheritance tax is £325,000 for individuals, or a combined nil-rate band of £650,00 for married couples or civil partnerships in addition to the main residence nil-rate band (RNRB) currently £175,000 (per individual), whereby no tax is paid on amounts at or below this level. However, any balance over this threshold could be subject to a tax charge which at present, is a standard inheritance tax charge rate of a hefty 40%, or 36% where 10% of the net estate is left to charity. Other tax rate charges may apply and are discussed later in this article.

You’re also going to be hearing the term “gift” throughout this article. But what is a gift? Forget about ribbons and wrapping paper. HM Revenue and Customs (HMRC) defines a gift as something which has a value (i.e. possessions, money, property), or a loss of value that occurs when something is transferred (i.e. if you sell a house for less than it’s worth to your children, the difference in value is defined as a gift). These gifts are sometimes referred to as gifts ‘inter vivos’, which simply means gifts made between living people. For inheritance tax purposes, gifts inter vivos can still be relevant when calculating the value of an estate, particularly if the person making the gift dies within 7 years.

For more information about general inheritance tax-related topics, we have created a handy downloadable guide. 

Understanding the 7 year gift rule in inheritance tax 

So, what is the 7 year rule in inheritance tax? Essentially, there are a range of gifts that are exempt from inheritance tax. Everything else is defined as either a chargeable lifetime transfer (CLT), which is for gifts into a discretionary trust that may be subject to an immediate 20% IHT charge (if paid by the trust, or 25% if paid by the settlor), or a potentially exempt transfer (PET) where the gift will only be completely tax-free if you live for 7 years after gifting it (assuming that the gift has been given to an individual, rather than a business or trust). Potentially exempt transfers are therefore a key part of the 7 year rule, because they may become fully exempt from inheritance tax if the donor survives for 7 years after making the gift. If you die within 7 years of gifting the asset, then the gift will count towards your nil-rate band, as we mentioned above, meaning that it may still be subject to IHT. After 7 years, the gift doesn’t count towards the overall value of your estate. This is known as the 7 year gift rule in inheritance tax. However, the 14 year rule may mean that a failed CLT brings a previous PET back into the estate for assessment.

What is the gift inheritance tax threshold? 

As we stated earlier in the article, the inheritance tax threshold (also referred to as the nil-rate band) is £325,000 plus the £175,000 RNRB (if available). This is the total amount of your estate that you can pass onto your inheritors without paying IHT. However, if the value of your estate exceeds the gift inheritance tax threshold, you’ll have to pay inheritance tax on anything above the threshold. For example, if your estate is valued at £450,000, you will only need to pay inheritance tax on £125,000 (assuming no RNRB is available). 

Inheritance tax-free gifts 

If you die within 7 years of gifting an asset to an individual, the 7 year gift rule in inheritance tax means that the beneficiary may be required to pay IHT. If you want to protect your wealth for your loved ones, it’s important to remember that some gifts don’t incur any inheritance tax charges if you give them away while you’re still living. 

Inheritance tax-free gifts include: 

• Gifts to your partner or spouse – any gifts you make to your long-term resident spouse (previously uk domiciled) are free from inheritance tax. However, if you are classed as long term resident when you die and your surviving spouse is not, the tax free amount is limited to £325,000.
• Wedding gifts – in a wedding/civil partnership, you can gift (free from inheritance tax) up to £5,000 to a child, £2,500 to a grandchild/great grandchild, or £1,000 to anyone else.
• Gifts from your income – as long as the gift doesn’t affect your normal standard of living, you can make gifts out of your normal income, i.e., Christmas/birthday/anniversary presents, regular payments, life insurance policy premiums, etc.
• Gifts to assist with family maintenance – gifts helping your relatives (i.e., ex-spouse/former civil partner, a child, or a dependent relative) with living expenses are free from inheritance tax.
• Gifts to charities – you can make gifts of any value to charities, universities, museums, and community sports clubs without paying inheritance tax.
• Gifts to political parties – finally, gifts to political parties are exempt from inheritance tax if, at the last general election before your death, the party either had at least two MPs elected to the House of Commons, or had one MP elected and, across all constituencies where it stood candidates, the party received at least 150,000 votes in total.

There’s also an annual exemption for inheritance tax-free gifts worth up to £3,000. In other words, every year you can gift up to £3,000 free from inheritance tax. Furthermore, you can carry over an unused annual exemption from the previous year, provided that the current year's allowance is used first. Remember that gifts valued above the gift inheritance tax threshold of £3,000 are subject to IHT. In addition, there’s the small gifts exemption, which enables you to make an unlimited number of small inheritance tax-free gifts each year, outside of your annual exemption. These gifts are for up to £250 each, provided that you have not already used another exemption for the same person. 

What is taper relief? 

Another key aspect of the 7 year rule in inheritance tax, is taper relief. Essentially, taper relief comes into play if the benefactor doesn’t live for the full 7 years. It means that if the benefactor survived for 3 years or longer, the inheritance tax payable is applied on a sliding scale. As you can see, it’s better to give gifts earlier, rather than later. 

Remember, taper relief only applies to the amount of tax the recipient has to pay on the value of the gift that’s above the nil-rate band. 

For example, suppose Person A gifted £600,000 to their son in May 2016. Person A died in March 2021, having left their £1,200,000 estate to their son as well. Because Person A died within 7 years of making the gift, it contributes towards their nil-rate band. IHT is due on the value of the gift above the nil-rate band (£600,000 - £325,000 = £275,000), but because Person A died 4-5 years after making the gift, the amount of IHT their son is required to pay was reduced by 40%. So, the overall amount of inheritance tax that Person A’s son needed to pay was £66,000 (£275,000 x 24% = £66,000). 

Because the gift used up Person A’s entire nil-rate band, their son will need to pay inheritance tax on the estate at the full 40% IHT rate as well. This means that the estate of Person A had to pay £480,000 (£1,200,000 x 40% = £480,000) before the assets could be distributed. 

There are separate rules around property, which means a higher nil-rate band is available for some, known as the residence nil-rate band. The residence nil-rate band is only applicable to direct descendants, so it’s important you understand the rules depending on who is receiving the gift, how the tax is applied to the gift and how these different rules apply to you.  

Pensions and inheritance tax

Although currently pensions usually fall outside your estate for inheritance tax purposes, it’s important to understand how your pension wealth is passed on. If you die before the age of 75 and your pension is in a defined contribution scheme, your beneficiaries can usually inherit the fund tax-free. If you die after 75, the money passed on will be subject to income tax at their marginal rate, but not IHT.

However, this is all set to change. In one of the most significant recent announcements, the government has confirmed that from April 2027, unspent defined contribution pensions will be included in a person’s estate for inheritance tax purposes. This will bring pensions under IHT for the first time in decades, affecting many estates that previously expected to fall below the threshold. As pensions often represent a substantial portion of an individual’s total wealth, this change could lead to a notable increase in the number of estates facing IHT liabilities. Reviewing how your pension is structured and who is nominated as your beneficiary is essential.

Who pays inheritance tax on gifts?

If you end up incurring IHT on gifts because of the 7 year gift rule in inheritance tax, you’re probably wondering who’ll actually need to make the payment to HMRC. It’s a legitimate question.

If your estate is above the nil-rate band, funds from your estate will be used to pay inheritance tax to HMRC. This will be dealt with by the person who is dealing with the estate (if there’s a will, this person is referred to as the executor). When it comes to gifts, if the benefactor dies before 7 years have elapsed, the recipient of the gift may have to pay IHT.

How can we help? 

The gift inheritance tax threshold along with the broader 7-year gift rule, is a fairly complex topic. Understanding how gifts ‘inter vivos’ and potentially exempt transfers fit into your wider estate planning can help you make more informed decisions about passing on wealth during your lifetime. If you would like to discuss your specific situation and explore inheritance tax planning options, please contact The Private Office for a free initial consultation with one of our financial advisers.

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The Financial Conduct Authority (FCA) does not regulate estate planning, tax or trust advice.

This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available.