Changes to your tax position following separation

When you separate from your partner, tax is probably the last thing on your mind. But, once the dust clears, it’s worth getting to grips with the changes to your tax position.

Recent changes to the post-separation window mean that you now have three years to move assets between you and your spouse. 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 (PPR) (e.g. they were living in rented accommodation away from the matrimonial home).

What does the recent 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 can elect to treat the former matrimonial home as their principal residence even if another property is potentially eligible for that treatment.

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 once the parties have entered into a ‘separation/divorce’ agreement. Only assets listed in that separation/divorce agreement can be transferred at no gain/no loss. However, there’s no time limit in which to transfer the assets listed in that agreement at no gain/no loss.
• It may be that you and your ex have missed the three-year time frame. If this is the case, you can enter into a separation/divorce agreement at a later date, and the assets mentioned in that agreement can be transferred at no gain/no loss.

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

Changes to the post-separation window had been mentioned originally in November 2021. But the new legislation was enacted without much lead-up in March 2023, giving very little time to arrange affairs and transfer assets – particularly if separation took place late in the tax year.

Although it shouldn’t be your main focus, talk to us about the tax and related consequences that can arise from the division of assets following separation.