Working out the date of separation for tax purposes

Tax On Divorce » July 16, 2021

Why does it matter?

Under current tax rules, married couples can transfer assets between themselves under the no gain no loss principles.  This means that no tax is payable when assets are transferred.  This treatment continues up to the end of the tax year in which the couple separate. Due to the benefits that come from this treatment (ie not having to pay Capital Gains Tax (CGT) when there is limited or no cash available), it is important to get it right.    

If a couple separate on 5 February, they will only benefit from the no gain no loss treatment until 5 April. For couples separating on 6April, however, they will have until the following 5 April to benefit from the same treatment.

For both income tax and CGT, a married couple or civil partners are treated as living together unless:

●            they are separated under an order of a court of competent jurisdiction;

●            they are separated by deed of separation; or

●            they are, in fact, separated in circumstances in which the separation is likely to be permanent.

(See TCGA 1992, s 288(3); ITA 2007, s 1011).

The question whether a separation is permanent tends to be judged with the benefit of hindsight. However, the test is whether the separation is likely to be permanent, not whether it actually proves to be permanent. In Bradley v Revenue & Customs Commissioners, the tribunal accepted that a separation had been likely to be permanent even though a reconciliation had unexpectedly taken place. This is very much a question of fact and in Benford v HMRC [2011] UKFTT 457 (TC), the tribunal found that the taxpayer had not discharged the burden of proof required to demonstrate that his separation from his wife had been likely to be permanent.

Separated but living together

Due to the pandemic, many couples separated but continued to live in the same home. In these circumstances, selecting the date of separation can be tricky.  It is possible for a couple to be separated in the family law sense if they are living separate lives under the same roof.  However, It Is also possible for a couple not to be separated if they are resident in different jurisdictions, for example, where one of them has gone to live overseas for employment purposes and the other has stayed at home.

For the circumstances where say a husband and wife may be considered to have separated while still living under the same roof, see Holmes v Mitchell (HM Inspector of Taxes) [1991] BTC 28.  The General Commissioners found that a husband and wife were living as separate households under the same roof and Vinelott J, as he then was, accepted the conclusion that they were living apart with the consequence that the husband was not entitled to the higher personal allowance. 

During this case, Lord Denning referred to a decision of the Divorce Division in Wanbon v Wanbon [1946] All ER 366, where the parties were said to be still living in the same household even though they were in the process of a divorce. They were still sharing the same living room and eating at the same table. He commented:

‘In cases where they are living under the same roof, [separation] is reached when they cease to be one household and become two households; or in other words, when they are no longer residing with one another or cohabiting with one another.’

In deciding whether separate households have been created, thought should be given to the following issues:

  • How has the accommodation been divided between them?
  • How do they use the common areas?
  • How are the finances of living together separated?

Permanent separation will, typically, be followed by the commencement of court proceedings for the dissolution of the marriage.

Illustration – difference between separation for tax purposes and in the geographical sense

Meet Henry and Henrietta and Nigel and Nigella. 

Each couple is married and they all live in the UK.  Henrietta receives a job offer in the UAE. This is a permanent position and all of the duties of her employment will be performed outside of the UK.   She decides that she will take the job.  However, Henry has a good job in the UK and does not wish to join her. Henrietta will cease to be a UK resident but they remain happily married.

Nigel and Nigella, however, have fallen out.  They continue to live together but Nigel shuts himself away in one or two rooms of the house. They cease to share any communal areas and they stop communicating with each other.  They are living as if they were separated by a door and everything indicates that their separation will be permanent.

Therefore, Henry and Henrietta are still living together for tax purposes even though they are resident in different countries, and Nigel and Nigella are permanently separated for tax purposes even though they continue to live in the same property.

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