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Tax mitigation uncertainty for financial settlements
Connie Atkinson
Historically, a non domiciled divorcing couple have been able to mitigate their UK tax liabilities when making a lump sum payment to the other party to the divorce. Following guidance from HMRC in 2025, however, it seems that this particular tax mitigation strategy is no longer available and advice needs to be taken in respect of each party’s tax status, the timing and mechanism of payments and the likely tax liability.
Financial proceedings
As part of any divorce or dissolution proceedings, both parties must provide full and frank disclosure of their financial circumstances. This includes details of the net value of all property and investments whether held onshore or offshore. When assessing the net value of assets, it is important to take advice about the potential costs of sale and tax associated with realising (or transferring) any of the assets owned by the parties. Advice is even more important if the assets and or tax status of one or both of the parties is not straightforward and where assets are held offshore.
Tax regimes
It used to be possible for UK residents who were non-domiciled for UK tax purposes to only pay tax on foreign income and gains (FIG) when they were remitted to the UK. If remittance was made by the UK resident non-UK domiciled individual or a connected or relevant person on their behalf (such as their spouse), then the remittance would be taxable. From April 2025, however, the remittance basis of taxation was abolished for UK resident non-domiciled individuals and was replaced by a residence-based regime. The government introduced a 4-year FIG regime which permits certain individuals to receive 100% relief on FIG. After this (and for those who do not qualify for the 4-year FIG regime), UK tax is residence-based and non-dom status has less significance.
For unremitted “remittance basis FIG” accumulated prior to April 2025, there are still options available to mitigate tax and it is important to understand the position and the extent to which it may impact any financial settlement on divorce.
Previous tax mitigation strategy
Historically, it was not uncommon to use an ex-spouse’s newly divorced status to facilitate the transfer of FIG to the UK without tax being incurred. While tax would have been payable on amounts remitted to the UK by a UK resident or their spouse as a connected person, if payment was made after decree absolute or the final divorce order (ie when the marriage has formally been brought to an end) the other party will no longer be a “spouse”. If, therefore, the paying party used unremitted FIG outside the UK to fund a payment to the other party, no UK tax liability would arise provided that the payment to the receiving party was made offshore, the monies were not remitted to the UK by the receiving party until after decree absolute (or “final divorce order” as it became known), and the funds were not used for the benefit of any minor children.
HMRC’s Challenge in 2025
Having historically accepted the above process, HMRC have since confirmed their view that a payment by a divorcing spouse in settlement of a lump sum payable as part of the financial settlement on divorce is a “benefit to the UK resident taxpayer”, thereby constituting a remittance, on which UK tax is therefore payable. While this will no doubt be subject to challenge, the potential consequences and options available are important for UK resident spouses seeking to implement financial settlements now.
Following changes to the Income Tax Act 2007, specific reference is now made in HMRC’s Remittance Basis and Domicile Manuals to a payment by a UK taxpayer, using untaxed, unremitted FIG, to discharge a financial settlement in divorce proceedings as being a benefit to the relevant person/UK taxpayer upon which tax would therefore be payable. While this is still being disputed with HMRC, HMRC’s current position is that tax would be payable on any untaxed FIG used to make this payment if brought onshore. If this remains the case, that tax needs to be factored into the asset schedule and any financial settlement.
It is worth noting that this issue is also relevant to parties who reached a financial settlement on the basis that the previously approved tax mitigation strategy would work but have not yet implemented their order by paying the lump sum offshore and the ex-spouse bringing it onshore.
Finally, while the UK tax position on untaxed, unremitted FIG may be uncertain, for settlements which need to be implemented now, the temporary repatriation facility (TRF) is available. As part of the changes brought in following the 2024 Autumn Budget, a relief called the TRF permits remittance basis FIG from before April 2025 to be remitted at a special tax rate (which is 12% for tax years 2025/26 and 2026/27 and 15% for the tax year 2027/28). For the time being, therefore, in most cases this is likely to be the tax rate applied to untaxed FIG in the asset schedule used in financial proceedings on divorce for a UK resident with untaxed FIG.
about the author
Connie is a Partner in the family team and has experience of dealing with all aspects of private family work relating to both finances and children.
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