Tax can have a significant impact on the true value of a divorce settlement, yet it is not uncommon for one or both parties to discover an unexpected tax liability after the financial order has been approved. Receiving a demand from HM Revenue & Customs (HMRC) months after believing everything had been finalised can come as a considerable shock.

Why unexpected tax bills arise after divorce

Many separating couples focus on reaching an agreement about assets without fully considering the tax consequences of transferring, selling, or retaining them. While family solicitors routinely identify tax issues, specialist tax advice is often needed where there are substantial assets, businesses, investments or pensions.

Unexpected liabilities can arise because the tax position was misunderstood, legislation changed, assumptions proved inaccurate, or because information was incomplete during negotiations.

In other cases, the tax may have been identified but underestimated, leaving one party responsible for a much larger liability than expected.

Capital Gains Tax can significantly affect settlements

One of the most common unexpected liabilities involves Capital Gains Tax (CGT). Although transfers of assets between spouses and civil partners have historically benefited from favourable tax treatment, timing can be crucial following separation. Once certain deadlines have passed, transferring investment properties, shares or other chargeable assets may trigger CGT that neither party anticipated.

This issue can become particularly significant where:

  • An investment property is transferred after the relevant tax relief period
  • Shares have increased substantially in value
  • Holiday homes or second properties are sold following divorce
  • Business interests are transferred between former spouses

If the financial settlement assumed that an asset could be transferred tax-free, the eventual liability may substantially reduce its true value.

Stamp Duty Land Tax issues

Stamp Duty Land Tax (SDLT) can also create unexpected financial consequences. Although many transfers made under court orders are exempt from SDLT, certain transactions involving mortgages, investment properties or subsequent purchases may still trigger tax liabilities.

For example, if one spouse takes over responsibility for a significant mortgage as part of the settlement, SDLT consequences may need careful consideration depending upon the circumstances.

Self-assessment and income tax liabilities

Divorce can also expose unpaid income tax obligations, particularly where the following income applies:

  • Previously undeclared rental income
  • Tax arising from self-employment
  • Business profits
  • Dividend income
  • Overseas income
  • Errors within previous self-assessment returns

Where spouses jointly owned assets or one party relied upon information supplied by the other, the eventual liability may come as a complete surprise.

Can a financial settlement be revised?

Family courts strongly favour finality, so once a financial order has been approved, both parties are generally expected to comply with it. The court will not normally reopen a settlement simply because one party later regrets the agreement or because an asset proved less valuable than expected after tax. However, there are exceptional circumstances that may justify reconsideration.

When might the court consider reopening a settlement?

The courts have recognised limited situations where justice may require a financial order to be revisited; including but not limited to:

  • Fraud or deliberate non-disclosure
  • Material mistakes affecting the agreement
  • Significant procedural unfairness
  • Exceptional events occurring shortly after the order that fundamentally undermine the basis upon which it was made

Every case depends upon its own facts, and simply discovering an unexpected tax bill does not automatically satisfy the legal test. Here, the court will consider matters such as:

  • Whether the tax liability genuinely could not have been anticipated
  • Whether proper disclosure was provided
  • Whether specialist advice was obtained
  • Whether the tax significantly alters the fairness of the settlement
  • Whether reopening the order would itself create unfairness

Does it matter whether the tax relates to assets acquired during the marriage?

The relevant issue is usually whether the tax affects assets or financial arrangements that formed part of the court-approved settlement rather than simply whether those assets were acquired during the marriage.

For example, a tax liability connected with a business owned before marriage may still become relevant if that business formed part of the financial negotiations. Likewise, investment properties purchased during the marriage are not automatically treated differently simply because the tax arises after divorce.

The court examines the overall fairness of the settlement rather than applying a simple rule based upon when the asset was acquired.

What if the tax arose because of a mistake?

Mistakes can arise for many reasons, including things such as professional advice being incomplete, financial assumptions proving incorrect, or inaccurate valuations. The court distinguishes between ordinary commercial risk and a mistake so fundamental that the agreement itself was built upon a false basis. That said, it is important to remember that not every professional error results in the financial order being changed.

In some situations, the more appropriate remedy may involve obtaining advice about a possible professional negligence claim rather than seeking to reopen the divorce settlement itself.

What if one party failed to disclose important tax information?

Each party has an ongoing duty to disclose material financial information honestly and completely. If one spouse deliberately concealed tax liabilities, failed to disclose ongoing HMRC investigations, hid business tax exposure, or withheld information that materially affected negotiations, the court may view the settlement very differently.

Non-disclosure is treated seriously because parties cannot negotiate fairly without accurate information. Depending upon the circumstances, the court may consider whether the financial order should be set aside and reconsidered.

Practical steps after receiving an unexpected tax bill

Receiving a substantial tax demand can be alarming, but acting promptly is important. Rather than assuming the settlement can automatically be changed, sensible steps include:

  • Carefully reviewing the HMRC assessment
  • Gathering the financial order and supporting documentation
  • Obtaining advice from a family solicitor
  • Seeking specialist tax advice to confirm whether the liability has been calculated correctly
  • Collecting evidence showing how the settlement was negotiated
  • Identifying whether relevant tax information was disclosed during negotiations
  • Considering applicable time limits before making any legal application

If you have received an unexpected tax bill following your divorce and are concerned that it has undermined the fairness of your financial settlement, obtaining prompt advice from both an experienced family solicitor and a specialist tax adviser can help you understand your position, assess whether the settlement can be challenged, and determine the most appropriate course of action.