TQOTW: Date of Separation for CGT

Jack and Jill started living apart in November 2018 but there was then no contemplation of a divorce. In May 2019 they discussed their situation and at that point in time decided to get divorced. They agreed to get divorced in January 2020.

In June 2019 they agreed a plan to transfer assets between themselves before 6 April 2020 as part of the divorce settlement. The proposed transfers include a large property with a market value of £1 million which originally cost £200,000 many years ago and which Jack will acquire from Jill. She is concerned about the CGT implications.

The property being disposed of by Jill shows a gain of £800,000 based on market value. Jill is seeking to rely on a transfer of assets between spouses who are living together is treated as taking place for such consideration as will give neither a gain nor a loss to the transferor by virtue of s 58 TCGA 1992.

The no gain and no loss situation continues until the end of the tax year in which the couple cease living together by virtue of s 58(1) TCGA 1992.  The key to the correct tax treatment is to determine when the couple stopped “living together” within the meaning of s58.  So did the separation take place in November 2018 or June 2019?

For CGT purposes, the meaning of a couple “living together” is determined by s288(3) TCGA 1992 which refers to the income tax definition in s 1011 ITA 2007.  S1011 ITA 2007 states that a couple are treated as living together unless they are in fact separated and this is likely to be permanent.  The HMRC manuals provide further commentary in CG22070 stating:

 “If the marriage or civil partnership has not broken down but the couple do not reside in the same house they are still treated as living together for Capital Gains Tax purposes.”

In Holmes v Mitchell (HM Inspector of Taxes) [1991] BTC 28 the spouses lived in the same house but lived separate lives and on the facts of the case it was held that they were not living together for income tax purposes. However, it is useful to note that the taxpayer had already declared his intention to seek a divorce and subsequently, in a petition on the grounds of separation, it was agreed between their solicitors that the taxpayer and his wife had been separated from that date. In the absence of similar circumstances, Jack and Jill may decide to rely on HMRC’s guidance in CG22070 above.

Full disclosure should be made on Jill’s Tax Return to demonstrate that when the couple started living apart in November 2018 it was not likely to be on a permanent basis.  Contemporaneous evidence might be required to indicate a temporary arrangement was envisaged at the time.  Given that the divorce is planned to go ahead in February 2020 HMRC’s presumption might be that the couple separated and started living apart on a permanent basis in November 2018.  If HMRC open an enquiry they will be keen to see the documents presented to the court and correspondence between solicitors to ascertain at what point in time the separation was likely to be permanent.

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Steven worked in private practice in tax from 1990 where he gained wide experience in accountancy and taxation on a variety of interesting and challenging assignments.

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