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    TaxKilnUK tax guidance
    TaxKilnUK tax guidance

    Divorce Tax for the Self-Employed

    The FA 2023 CGT reform, business valuation, pension sharing, and ongoing tax

    From 6 April 2023, transfers between separating spouses are CGT-free for up to 3 tax years after the year of separation — or without time limit if made under a formal court order. This is a massive improvement on the old rule that stopped at the end of the tax year of separation. For self-employed people, the extra complexity is business assets: company shares with base cost issues, partnership interests with goodwill, sole-trade assets with nil base cost, and property with mixed residential/business use. Pension sharing orders are not taxable events for either spouse.

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    Guidance, not advice. We explain the rules, we don't assess your situation. Always seek financial or tax advice from your accountant, or contact HMRC. Read our editorial scope →

    CGT reform — FA 2023

    Before 6 April 2023, no-gain/no-loss treatment between spouses ended at the end of the tax year of separation. A couple who separated in March could find themselves only weeks away from losing CGT-free transfer status — which often forced rushed, badly-priced transfers or large unplanned CGT bills. FA 2023 changed TCGA 1992 s.58. From 6 April 2023: • Three full tax years after the year of separation in which transfers are CGT-free • Unlimited time if transfers are made under a formal court order (e.g. a financial remedy order or consent order) • Receiving spouse inherits the transferring spouse's base cost — so the gain is deferred, not erased 'Separation' for these purposes means living apart in circumstances where the separation is likely to be permanent (broadly the same test as in TCGA 1992). The transition: the new rule applies to disposals on or after 6 April 2023, regardless of when the couple separated.

    Business valuation

    Sole trader: typically valued at net asset value (capital account) plus a goodwill component. Goodwill is often expressed as a multiple of sustainable annual profit (1–3×), discounted heavily for businesses that depend on the personal reputation of one partner. Ltd company: the court usually appoints a Single Joint Expert (SJE) forensic accountant. Fee range £3,000–£10,000+ depending on complexity. The SJE typically builds: • Earnings multiple (EBITDA × industry multiple) or DCF • Minority discount if the spouse holds a minority stake • Discount for lack of marketability (private company shares are illiquid) • Liquidity overlay — can value actually be extracted from the company without triggering large CT or income tax bills? Partnership: governed by the partnership agreement first. If silent, Partnership Act 1890 defaults apply. Dissolution accounts are usually required to put a number on the spouse's interest.

    Transferring company shares

    Within the no-gain/no-loss window (3 tax years after separation, or any time under court order), shares can be transferred between separating spouses without triggering CGT. The receiving spouse inherits the transferor's base cost — so when they eventually sell, the historic gain crystallises in their hands. Outside the window and without a court order, the transfer is deemed to be at market value (TCGA 1992 s.18 — connected persons rules apply until decree absolute). This can produce a CGT bill even though no cash changes hands. Practical tips: • If the transfer is part of a contested process, push for a formal court order so the unlimited window applies • Document the consideration carefully — share-for-share, buy-out by company, third-party buyer • If the receiving spouse intends to sell soon, factor the inherited base cost into the financial settlement

    Transferring partnership interests

    No-gain/no-loss treatment is available for partnership interest transfers between separating spouses on the same terms as for shares. In practice, a buy-out is more common than transferring an interest — most couples find ongoing co-ownership of a business after divorce unworkable. A buy-out typically involves: • Valuation of the spouse's interest (capital account + share of goodwill) • Payment in cash, instalments, or other assets (e.g. the family home) • Updated partnership agreement reflecting the change • Tax: CGT on disposal of the partnership interest (subject to no-gain/no-loss if within window), BADR potentially available for the disposing spouse if conditions met

    Sole trade business assets

    A sole trade has no separate legal entity — only the individual assets (vehicles, equipment, goodwill, stock, business property). On divorce, the question is whether to transfer individual assets or the whole business. Individual assets: each is a separate disposal. CGT-free within the no-gain/no-loss window. Stock is dealt with at cost. Whole business: includes goodwill, which often has nil base cost (self-generated goodwill is not acquired for tax purposes). The receiving spouse inherits nil base cost and a chargeable gain crystallises whenever they eventually sell or cease. BADR may be available if the disposing spouse is selling the business outside the divorce context, but BADR generally does not apply to no-gain/no-loss transfers (there is no chargeable gain to claim relief against).

    Business property

    Property used partly as the family home and partly for business is one of the most common complications. The residence portion: Principal Private Residence relief (TCGA 1992 ss.222–226) shields gain on the residential part — even after separation, the departing spouse can continue to claim PPR on the home under the new rules (formerly s.225B, now updated by FA 2023) provided certain conditions are met. The business portion: exclusive business use forfeits PPR for that proportion. Gain on the business portion is chargeable on sale. Company-owned property: if the home is held by a Ltd company, transferring it to the departing spouse involves CT on the company's gain plus an income tax / dividend / loan account event on extraction. Specialist advice essential — this is one of the worst structures to unwind in divorce.

    Pension sharing orders

    Pension sharing orders (introduced by the Welfare Reform and Pensions Act 1999) let a court divide one spouse's pension between both spouses on divorce. Key tax points: • Not a taxable event for either spouse — the transfer is administrative, not a chargeable disposal • Recipient receives a 'pension credit' which goes into their own pension scheme (or a new one) in their own name • State Pension cannot be shared — only private/occupational pensions • Pension credit does NOT count toward the recipient's Annual Allowance for the year • Lifetime Allowance abolished from April 2024 — replaced by lump-sum and death benefit allowances (£268,275 and £1,073,100 respectively in 2025/26) Pension sharing is often the most tax-efficient way to balance a divorce settlement — far cleaner than trying to offset pension value against the family home.

    Maintenance payments

    Spousal maintenance and child maintenance, since March 2000, are: • Not deductible from the payer's income • Not taxable for the recipient • Paid out of post-tax income You cannot reduce trading profits by paying maintenance — HMRC will disallow any attempt to treat maintenance as a business expense. The payer's adjusted net income for HICBC and personal allowance taper is unaffected by maintenance paid (because it is not deductible). Very old orders pre-dating March 2000 may retain the old treatment under transitional rules, but these are increasingly rare.

    HICBC after divorce

    High Income Child Benefit Charge applies when: • Your adjusted net income exceeds £60,000 AND • You (or your partner) live with the child and claim Child Benefit After separation, HICBC only applies to the parent who lives with the child. If you have moved out and no longer live with the child, you are NOT liable for HICBC even on a £100,000+ income. Practical steps after separation: • Update HMRC immediately about living arrangements (online via personal tax account) • If the lower-earning spouse now lives with the child, they may stop being liable for HICBC entirely • Continue to claim Child Benefit (even at the zero-payment election) to protect NI credits toward State Pension • Pension contributions can manage adjusted net income below £60,000 for the remaining parent if they want to keep full CB

    Practical timeline

    A six-step sequence for navigating the tax side of separation: 1. Identify the separation date — formally. This drives the no-gain/no-loss window. Write it down. 2. Calculate your window. Separation in any month of 2025/26? Your three-year no-gain/no-loss window runs to 5 April 2029. 3. Rationalise ownership — work out which assets sit where, with what base cost, and which are entitled to PPR or BADR. 4. Progress the financial remedy — a formal consent order locks in unlimited no-gain/no-loss treatment for future transfers (an essential safety net). 5. Implement pension sharing as part of the order rather than offsetting — cleaner, more tax-efficient. 6. Notify HMRC: marital status change (loses Marriage Allowance), HICBC change, address change. Reflect any business restructuring in next SA return and through Companies House if Ltd.

    Statute references: TCGA 1992 s.58 (as amended by FA 2023); Matrimonial Causes Act 1973 s.24-25; Pension Schemes Act 1993; ITEPA 2003 s.681B.

    Frequently asked questions

    What happens if I miss the Self Assessment deadline?+
    The Self Assessment deadline is 31 January (online filing) for the previous tax year. Miss it and HMRC apply an automatic £100 penalty. Beyond that: £10 per day from 3 months late (capped at £900), 5% of tax due at 6 months late, and another 5% at 12 months late, under Schedule 55 of the Taxes Management Act 1970. If you have a genuine reason (serious illness, bereavement, technical issue with HMRC's systems) you can appeal with evidence; HMRC accepts reasonable excuse appeals in most genuine cases.
    Do I need an accountant or can I file Self Assessment myself?+
    Legally you can file Self Assessment yourself via gov.uk for free, most simple sole-trader returns (single income source, basic expenses) are realistic to self-file. An accountant adds real value when: your trading profit is above £40,000 (extraction-strategy decisions matter), you have multiple income streams (PAYE + self-employment + property + dividends), you've crossed the £90,000 VAT threshold, you're considering incorporation, or you have an HMRC enquiry. Expect to pay £400-£1,500/year for a typical sole-trader accountant; the cost is itself a deductible expense.
    How do payments on account work?+
    When your Self Assessment tax bill exceeds £1,000 for the first time, HMRC requires payments on account toward NEXT year's tax. Half the current bill is due 31 January (alongside the current bill); the other half is due 31 July. So your first January after crossing the threshold can hit with a double-bill: last year's balance + first payment on account. Adjust via Form SA303 if you expect next year's income to drop substantially. Payments on account don't apply if more than 80% of your tax is collected via PAYE.
    How long do I have to transfer assets CGT-free after separation?+
    Three full tax years after the tax year in which you separated — or without time limit if the transfer is made under a formal financial order from the court. This is the post-FA 2023 rule that applies to disposals on or after 6 April 2023. Under the old rule, no-gain/no-loss treatment ended at the end of the tax year of separation itself, which often forced rushed transfers within weeks or months. The new rule is much more humane and lets couples negotiate properly.
    How is my business valued for divorce?+
    For a sole trader, valuation is typically net asset value plus a goodwill multiple (often 1–3× sustainable annual profit, depending on transferability). For a Ltd, the court usually appoints a Single Joint Expert (SJE) forensic accountant — typical fee £3,000–£10,000+ — who builds a discounted cash flow or earnings multiple, applies discounts for minority interest and lack of marketability, and considers liquidity (can value actually be extracted without tax?). For partnerships, the partnership agreement governs unless silent, in which case Partnership Act 1890 defaults apply.
    Is maintenance tax-deductible?+
    No, not since March 2000. Spousal maintenance and child maintenance are paid out of post-tax income — they are neither deductible for the payer nor taxable for the recipient. You cannot reduce trading profits by paying maintenance through the business. The only narrow exception is some very old maintenance orders predating March 2000 that retain the old tax treatment by transitional rules.
    What happens to Child Benefit after separation?+
    The High Income Child Benefit Charge (HICBC) is an individual test — it applies to the person whose adjusted net income exceeds £60,000 AND who lives with the child. After separation, if you no longer live with the child, you are not liable for HICBC even if your income is over the threshold. The parent who lives with the child (and claims CB) is the relevant person for HICBC. Update HMRC promptly: form CH995 / online change of circumstances. Continue to claim Child Benefit (even at zero payment) to protect NI credits toward State Pension.

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