Divorce Tax US UK: How Settlements, Maintenance and the Home Are Taxed

Divorce tax across the US and UK turns on one mismatch: both countries normally let separating spouses divide assets without tax, but the US relief is withdrawn when the spouse receiving the asset is not a US taxpayer, while the UK relief depends on timing or a court order. A settlement drafted with only one country in mind can leave the American spouse with a US tax bill and nothing from the UK to credit against it.

This guide is for couples where at least one spouse is a US citizen or green card holder and at least one has UK tax exposure. It covers the asset split, the family home, maintenance, child support, pensions and filing status, in that order. It is general information; a financial settlement needs family law advice and tax advice together.

How is a divorce settlement taxed in the US and the UK?

A transfer of assets between spouses as part of a divorce is generally not taxed at the time in either country, provided each country's conditions are met. The conditions are different, and a US citizen living in the UK has to meet both.

The US rule: nonrecognition, with a carve-out for nonresident alien spouses

IRS Publication 504 sets out the US position. No gain or loss is recognised on a transfer of property to your spouse, or to a former spouse if the transfer is incident to the divorce. A transfer is incident to the divorce if it happens within one year after the marriage ends, or if it is related to the ending of the marriage, meaning it is made under the divorce or separation instrument and takes place within six years after the marriage ends.

The person receiving the property takes over the transferor's adjusted basis, whatever the property is worth. The gain is deferred and passed across; it is not forgiven.

Then the exception that matters for transatlantic couples. Publication 504 states that the nonrecognition rule does not apply if your spouse or former spouse is a nonresident alien. A British spouse who is neither a US citizen nor a US tax resident is exactly that. When the American spouse transfers an appreciated asset to them, the US treats it as a taxable disposal.

The UK rule: no gain, no loss within a window

The UK reformed its rules for disposals on or after 6 April 2023. HMRC's guidance on Capital Gains Tax on separation and divorce gives separating spouses and civil partners no gain, no loss treatment until the earlier of:

• the end of the third tax year after the tax year in which they stopped living together; and
• the date the court grants the divorce or dissolution.

Transfers made in accordance with a formal divorce or separation agreement, or a court order, are no gain, no loss with no time limit. Outside those cases the transfer is treated as made at market value and the transferor can have a chargeable gain. As in the US, the recipient inherits the original base cost.

Where do the US and UK divorce tax rules collide?

The US and UK divorce tax rules collide when one spouse is a US taxpayer and the other is not. The table shows the usual outcomes for a transfer of an asset standing at a gain, made under a court order.

Who transfers to whom	UK Capital Gains Tax	US income tax	What to watch
US citizen to non-US spouse (nonresident alien)	No gain, no loss	Gain recognised by the US citizen	No UK tax paid, so no foreign tax credit against the US tax
Non-US spouse to US citizen	No gain, no loss	No US tax on the transfer; the US citizen takes the transferor's original basis	A low inherited basis means a larger US gain when the asset is later sold
US citizen to US citizen, both UK resident	No gain, no loss	Nonrecognition; basis carries over	Both reliefs apply; check the US six-year and UK timing conditions

Illustrative example: an American wife and a British husband, both living in Surrey, agree that she will transfer to him an investment portfolio she bought for $200,000 that is now worth $500,000. The transfer is made under a court order. For UK Capital Gains Tax it is no gain, no loss. For US tax the husband is a nonresident alien, so the wife recognises a $300,000 gain on her Form 1040, and because the UK has charged nothing there is no UK tax to credit. Had the settlement given him cash or assets with little built-in gain, and left the appreciated portfolio with her, the US charge would not have arisen.

The planning point is that which spouse receives which asset matters as much as the headline percentages. Assets with large gains in US dollar terms are better left with the US spouse or sold within a relief; cash and high-basis assets are better suited to crossing to the non-US spouse. Remember that the US measures gain in dollars, so an asset with no sterling gain can still show a dollar gain, as we explain in our guide to UK Capital Gains Tax for US citizens.

US gift tax during the marriage

Until the marriage legally ends, transfers between the spouses are also within the US gift tax rules. Gifts to a US citizen spouse qualify for an unlimited marital deduction. Gifts to a spouse who is not a US citizen do not; instead the IRS gives an annual exclusion of $194,000 for 2026. Transfers made under a qualifying written divorce agreement can be treated as made for full consideration, subject to timing conditions, so the sequence of agreement, transfer and decree should be checked before anything moves. Our estate and trust planning team deals with this alongside the settlement.

The family home

The home is usually the largest asset and has its own reliefs in each country.

UK. GOV.UK's guidance on tax when transferring assets on divorce confirms that you usually do not pay tax when you transfer or sell your main home. Private Residence Relief always covers the last nine months of ownership. For the spouse who has moved out, HMRC's manual at CG65356 explains that, for disposals on or after 6 April 2023 under a formal agreement or court order, the home can be treated as that spouse's main residence up to the disposal, provided it has remained the other spouse's main residence and the departing spouse has not nominated another home. The relief must be claimed, and it can reduce relief on a new home bought in the meantime.

US. The IRS exclusion on the sale of a main home is up to $250,000 of gain, or $500,000 on a joint return, where the seller owned the home and used it as a residence for at least two of the five years before the sale. A London property that has risen in value over a long marriage can exceed the exclusion, and for the US spouse the gain is computed in dollars at the exchange rates on purchase and sale. Paying off a sterling mortgage can create a separate US currency gain; see our article on section 988 currency gains.

If the home is transferred to the non-US spouse instead of being sold, the nonresident alien carve-out described above applies to the American spouse's share. Whether the home sale exclusion covers that deemed gain depends on the ownership and use tests on the transfer date, so the numbers need to be run before the order is finalised.

Is maintenance or alimony taxed in the US and UK after divorce?

For most divorces finalised today, spousal maintenance is tax-neutral in both countries: not deductible by the payer and not taxable income of the recipient.

In the UK, maintenance received is not taxable income. The only relief for a payer is Maintenance Payments Relief, which applies only where either party was born before 6 April 1935.

In the US, IRS Topic 452 states that for divorce or separation agreements executed after 2018, the payer cannot deduct alimony and the recipient does not include it in gross income. Agreements executed earlier can still be on the old basis, deductible to the payer and taxable to the recipient, unless they were later modified to adopt the new rule.

Child support is simpler. The IRS states that it is never deductible and is not income of the recipient, and where an order requires both alimony and child support, underpayments count towards child support first.

What the treaty adds

Where the payer lives in one country and the recipient in the other, Article 17(5) of the UK/US Double Taxation Convention applies to periodic payments made under a written separation agreement or a decree of divorce, separate maintenance or compulsory support, including payments for the support of a child. They are exempt from tax in both countries, except that if the payer is entitled to tax relief for the payments in their own country, the payments are taxable only in the recipient's country. Article 1(5)(a) lists paragraph 5 of Article 17 among the provisions that survive the saving clause, so a US citizen can rely on it. In practice this matters most for older US agreements where the payer still claims a deduction.

Pensions and retirement accounts

The US divides employer retirement plans by a qualified domestic relations order. Publication 504 explains that benefits paid to a spouse or former spouse under such an order are generally taxable to that recipient, and an eligible distribution can be rolled over tax-free into the recipient's own IRA or plan. The order is a creature of US state domestic relations law and US plan rules.

UK pensions are divided by a pension sharing order made by the family court, which moves pension rights from one spouse to the other inside the UK pension system. The IRS has not published guidance treating a UK pension sharing order as the equivalent of a qualified domestic relations order, so the US treatment of a share received by, or given up by, a US citizen needs specific advice, including on the treaty's pension articles. Our US/UK pensions service and our guide to UK pensions under the US tax treaty cover the background.

Filing status in the year of separation and divorce

The US decides marital status on the last day of the tax year. Publication 504 treats you as unmarried for the whole year if you have obtained a final decree of divorce or separate maintenance by 31 December. Until then you are married. Most Americans with a British spouse file as married filing separately; a parent with a child at home may qualify as head of household because the IRS treats a citizen whose spouse is a nonresident alien as unmarried for that purpose.

Couples who previously elected to treat the British spouse as a US resident so that they could file jointly should note that the election ends on legal separation or divorce, and the IRS describes it as a once-in-a-lifetime choice that cannot be made again. The spouse who leaves the US tax net at that point should check what that means for assets they still hold. The UK taxes each spouse individually throughout, so there is no UK filing status to change. We look at the joint-return election in our guide to US/UK mixed couple tax planning.

A checklist before the settlement is signed

1. Confirm each spouse's US status: citizen, green card holder, resident alien or nonresident alien.
2. List every asset with its original cost in both sterling and dollars, and the built-in gain in each currency.
3. Decide who receives what with the nonresident alien carve-out in mind.
4. Fix the timetable: date of separation, the UK three-tax-year window, the court order, and the US one-year and six-year periods.
5. Model the home under both Private Residence Relief and the US exclusion.
6. Check whether maintenance falls under a pre-2019 or post-2018 US instrument and how the treaty applies.
7. Get US advice on any UK pension share before the pension sharing order is drafted.

How we help with divorce tax across the US and UK

US/UK Cross Border Tax is a team of US CPAs and UK tax advisers working as one team, in London, Manchester, New York and San Francisco. We work alongside family lawyers to test a proposed settlement against both tax systems before it is agreed, and we prepare both countries' returns for the year of separation and the years after. Read more about our family tax planning for US/UK mixed couples, or contact us for a fee quote.