The author of this article argues that understanding the nuances of separation is crucial due to the financial implications which may arise from post-separation accruals.

As we continue to explore the implications of important legal rulings and developments affecting couples going through divorce and separation (see examples here, here and here), we carry the following article about the importance of noting the date on which couples separate, and what that means for how assets are divided. The article is from James Elliott-Hughes, an associate in the family team at law firm Charles Russell Speechlys. The editors are pleased to share these views; the usual editorial disclaimers apply to views of guest writers. To comment, email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com

For those in the divorce process, the day the parties separated can be a key inflection point, resulting in emotional and logistical changes to the relationship. This date can also have important consequences in establishing how assets are to be divided on divorce.

With the introduction of “no-fault” divorce in April 2022, the legal position in England and Wales changed considerably, and it is no longer possible to obtain a divorce on the grounds that you have already separated from your partner for a defined period. 

Despite this, the date of separation can be pertinent when one party has accrued significant assets since separating. In such circumstances, the said party may seek to ring-fence those assets and have them excluded from the shared marital pot. This is commonly referred to as post-separation accrual and it often applies to the following asset types:
-- Company interests/shares;
-- Bonuses and long-term share incentive plans;
-- Property portfolios;
-- Assets with delayed financial results, such as insurance syndicates; and
-- Inheritance.

Post-separation accrual is generally classified into three categories: new ventures, passive growth, and active growth. Whether an asset is non-matrimonial or not will depend on how it is categorised.

New ventures are those with no connection to the marital partnership or its associated assets and funds. In such cases, the asset will be deemed non-matrimonial and not capable of being divided with the party’s spouse. Such ventures will often need to be entirely new to qualify.

Passive growth, being the increase on the value of an asset that was obtained pre-marriage will not be subject to marital sharing principles. This usually applies to pensions, properties or investments obtained pre-marriage which have appreciated over the duration of the marriage. Passive growth on any assets obtained during the marriage is unlikely to be capable of being ring-fenced.

Active growth arises in situations where one party’s actions have increased the value of an asset. For an asset to be excluded, the party seeking to ring-fence it will have to show that the increase was attributable to their considerable skill or effort. Simply benefiting from favourable market conditions, without actively managing the asset, is unlikely to lead to a successful claim of active growth. 

The courts will also consider the source of the asset and the timing of the accrual. If the original asset which has accrued post-separation was directly linked to the marriage, then it is likely that it would retain its matrimonial characteristic. Likewise, the closer an accrual is to the date of the separation, the more likely it is to be considered connected to the marriage whereas accruals that have occurred years later, often due to protracted court proceedings, are more likely to be considered non-matrimonial. 

The date of separation will also be vital when establishing the duration of the marriage and can also affect the taxation status of couples who are divorcing. Since 6 April 2023, separating spouses can make “no gain no loss transfers” of assets for up to three years since the year of separation. A no gain no loss transfer means that where a spouse transfers an asset to another spouse, the asset is treated as being transferred at its original value, resulting in no taxable gain and therefore no capital gains tax arising. Assets which are the subject of a final financial court order or formal separation agreement have an unlimited time in which to be transferred. 

The separation test
In most cases, the date of separation will usually be agreed between the couple or may differ by mere days or weeks, which will not result in any claims of post-separation accrual being brought.

Separation is often marked by a clear catalytic event, such as one party moving out of the family home or filing the divorce application. However, where couples have attempted ‘trial separations’, have frequently lived apart for long periods whilst married, or have chosen to remain living together but separated, it can be difficult to determine when separation has officially occurred. 

The general test for establishing the date of separation is when a couple no longer live together as a married couple and have chosen to live apart. Importantly, this does not require the couple to physically separate from one another. Many couples may have separated but have chosen to remain in the matrimonial home, whether it be due to preserve the financial position or for practical reasons, such as providing stability for any children of the family. The separation test is based on fact and requires the parties to have separated in an emotional and practical sense. Factors that point towards a couple having separated may include sleeping in separate rooms, eating meals separately, carrying out their daily lives separately rather than as a married couple, or by making changes to the financial status quo. The courts will consider all these factors in cases where the separation date cannot be agreed, so it is important to have suitable evidence documenting these changes. 

Conclusive evidence of separation can also be obtained through entering into a separation agreement. Couples who wish to formally separate, but do not want to apply for a divorce immediately, or indeed ever (whether it be for religious, emotional, practical or financial reasons), may instead choose to enter into a separation agreement. 

This is a formal agreement setting out the terms of the separation and will set out the couple’s affairs post-separation. These agreements typically include how the finances will be divided, arrangements for any children of the family, what will happen in relation to shared property such as the matrimonial home, or how financial obligations and income needs will be met in the interim. 

Separation agreements are not automatically legally binding but will be considered by the court when determining the division of finances, particularly if the agreement was drafted correctly and the parties’ obtained legal advice at the time. Parties can decide to have a separation agreement amended into a final divorce order made by consent later in the process to make it legally binding.

Understanding the nuances of separation is crucial due to the financial implications which may arise from post-separation accruals. Whether through formal separation agreements or practical arrangements, documenting the separation process can provide much-needed clarity, allowing individuals to safeguard their interests during divorce proceedings. 

The separation process is one that is deeply personal and will be influenced by a myriad of factors, including emotional, financial, and practical considerations. For individuals looking to separate, the key lies in informed decision-making and thoughtful planning to allow all parties to move forward with well-needed clarity and confidence.