When you separate from your spouse, there are understandably far more important things to focus on than tax. But, once things begin to settle, it’s worth understanding how separation can affect your tax position.

Changes introduced in April 2023 to the post-separation window mean that you may now have up to three years to move assets between you and your spouse on a no-gain/no-loss basis in many cases. But what does this mean for your tax?

How the no-gain/no loss basis used to function

Generally, when you transfer assets between you and your spouse, this is treated as being on a no-gain/no-loss (NG/NL) basis. This basically means that you can transfer these assets without any capital gains issues or additional tax to pay.

However, this treatment was only available if you were married and living together in the tax year. The spousal benefit used to cease at the end of the tax year in which you were permanently separated. Transfers after that point were deemed to take place at market value, as you and your spouse remain ‘connected persons’ until the time of your divorce.

The departing spouse could continue to treat their absence from the former matrimonial home as if it was their only or main residence. But to do this, the property had to remain the principal residence of the other spouse, and the departing spouse had to be living somewhere that didn’t qualify for Private Residence Relief (PRR) (e.g. they were living in rented accommodation away from the matrimonial home).

What does the extension to the post-separation window mean?

That ‘post-separation window’ has now been extended to include up to three tax years following the end of the tax year in which the couple separate. The departing spouse may also be able to continue treating the former matrimonial home as their principal residence in certain circumstances, even if another property could potentially qualify for relief.

The legislation is based on ‘disposals’, so only disposals made on or after 6 April 2023 (or in the year of separation) qualify for the NG/NL treatment. So, what does this mean in real terms for your tax position and your ability to transfer assets to your ex?

• If you separated before 6 April 2023 (say March 2021) then you and your spouse would have up to three years from the end of the tax year you separated (i.e. starting 6 April 2021) to make any NG/NL transfers. But these transfers must be made on or after 6 April 2023. The window would close on 5 April 2024.
  
  
• The three-year window ends at the earlier of the end of the third tax year after the tax year of separation, or the date the divorce, annulment or dissolution is finalised. However, transfers made under a formal divorce or separation agreement or court order can still qualify for no-gain/no-loss treatment without any time limit.
  
  
• It may be that you and your ex have missed the three-year time frame. If this is the case, transfers made under a formal divorce or separation agreement or court order may still qualify for no-gain/no-loss treatment.
  
  

Talk to us about the tax aspects of moving assets between spouses after separation

The rules around separating couples and Capital Gains Tax changed significantly from 2023, giving separating spouses and civil partners more time to transfer assets on a no-gain/no-loss basis in many situations.

Although it shouldn’t be your main focus, if you would like talk to us about the tax and related consequences that can arise from the division of assets following separation, we’d be happy to help. Call our office on 01904 787 973 or book a call with Donald Inglis.