News | September 22, 2020


There is a wide Capital Gains Tax (“CGT”) exemption for transfers which occur between spouses during the tax year of separation (which runs from 6 April to 5 April). Note they must still be spouses, so not yet divorced, and the transfer must occur during the tax year of separation. Therefore, important timing considerations must be considered.

However, if assets are transferred between spouses in a tax year after separation, CGT will normally be an issue.  The parties will therefore need to consider which CGT reliefs might be available to them to mitigate the tax burden.  There is now a concern amongst practitioners that a previously thought exemption relating to CGT Holdover relief on business assets, which might have been used after the tax year of separation, is in doubt.

CGT Holdover relief defers CGT when business assets are gifted by one party (”the donor”) to another (”the donee”).  Where CGT Holdover relief is available, the donee is deemed to inherit the business assets at the donor’s base cost.  This means that there will be no immediate CGT for the donor but there will be CGT when the donee comes to sell the assets at a later date.

CGT Holdover relief is only available where there is a genuine gift and there is no ‘valuable consideration’.  Where there is a sale of assets for full market value it is quite clear that the sale price will be a valuable consideration. However, worryingly HMRC’s updated guidance now refers to the divorce case of Haines v Hill, which went to the Court of Appeal in 2007. Whilst that case concerned a trustee in bankruptcy trying to set aside a divorce order, it established that the compromise of a divorce claim constituted ‘valuable consideration’. The trustee in bankruptcy therefore failed but HMRC have now, it seems, cottoned on to the fact that a gift which was previously viewed as eligible for CGT Holdover relief, made as part of a divorce settlement, might also therefore constitute a transaction for valuable consideration, and thus give rise to an immediate CGT liability.

In other words, HMRC may now consider the donor of business assets, to be receiving in return value equivalent to the full value of the asset transferred by the donee, in exchange for the donee not pursuing alternative provision.  As the donor will be receiving ‘valuable consideration’ from the donee equal to the value of the shares transferred there is no ‘gift’ and therefore CGT Holdover relief will be denied. 

The problem is exacerbated by the reduction in Business Asset Disposal Relief from £10m to £1m in March 2020, in replacement of Entrepreneurs’ Relief.

This is a real issue and parties need to watch out for this potential. Further, divorce judges should also be made aware that without expert tax opinion on this point, no assumptions should be made that the transfer in question will be non-taxable in certain cases. Getting it wrong could mean a significant and unexpected immediate tax liability.

If as part of a divorce an interest in a business is professionally valued by a forensic accountant then such an accountant is usually asked to report on value, liquidity, and tax, but in cases where such a report is not obtained, or where the letter of instruction is lacking, a nasty surprise may lie in store for one of the parties.

The Family Team at Wedlake Bell LLP work very closely with our Private Client Team and also have access to a host of industry recognised expert forensic accountants, working closely with both on cases where appropriate, to ensure our clients’ interests are best protected at all times.

Simplified Case Study

Andrew (”A”) and Betty (”B”) are spouses who separated on 1 January 2020 (i.e. in the 2019/20 tax year).  They are not yet divorced.

A owns 500 shares in a trading company representing 100% of the issued share capital.  A started the company from scratch and his base cost of the shares was £500 (i.e. £1 per share).  His interest is now valued at £5m (£10,000 per share).

The Court has ordered A to transfer 250 shares to B (worth £2.5m) in settlement of all financial claims which B might have against A.

As the transfer between spouses is taking place in the tax year after separation, CGT is a possibility. 


A and B could jointly elect to claim CGT Holdover Relief.  This would mean B is deemed to inherit A’s 250 shares for their base cost of £250. 

There is no CGT for A on the transfer. 

When B comes to sell or otherwise dispose of the shares she will pay CGT on the difference between their market value at the time of the sale and her deemed base cost of £250.  However, there is no CGT for B until she sells or otherwise disposes of the shares.


HMRC will disallow CGT Holdover Relief as they will argue A has received ‘valuable consideration’ of £2.5m. 

As such, A will be liable for CGT of £500,000 (ignoring his CGT annual exemption and Business Asset Disposal Relief).

B will be deemed to inherit the shares for £2.5m which will be her base cost. B will only pay CGT on a later sale of the shares if they are worth more than £2.5m.