Nearly 100,000 people have terminated their marriages in the almost 20 years since Ireland voted to legalise divorce. As well as the emotional ramifications, the financial implications of divorce are often significant. It changes the legal standing of both spouses and their treatment when it comes to tax affairs.
We have recently worked with a lot of individuals who received a local property tax (LPT) bill for a property that they may only be a part-owner of, or (as a result of a separation) may no longer reside in. Understandably, the individuals concerned were not overjoyed.
However, Revenue says that if both parties continued to own the property, both are liable for the LPT bill. If no payment was received, Revenue simply selected one party as liable.
It does not entertain the idea of a liable person paying “their share” only – nor has it ever countenanced switching the status of the liable person from one partner to the other.
Unusually, given the protection the Constitution affords to ‘the Family’, there are ways a couple could actually benefit financially by separating. One of them is a potentially valuable relief known as ‘Year of Separation’.
This relief allows the assessable spouse to keep the full married credits and rate band for the year. They are assessed on their income for the year, but on the spouse’s income only up to the date of separation. The non-assessable spouse is assessed on their income from the date of separation to the end of the year but, crucially, they are also awarded the single person credits and rate band for the full year.
Therefore, the couple are effectively awarded an extra set of credits and rate bands!
In certain circumstances, separated or divorced couples can opt to continue to be taxed as a married couple if neither has re-married.
If a spouse or former spouse is being paid legally enforceable maintenance payments, these can be liable for tax. The spouse who makes the payments is entitled to a deduction from their income chargeable to tax and USC. The spouse who receives the maintenance is taxable on the payments.
Voluntary maintenance payments, however, are not taken into account when calculating either spouse’s tax liability – so the spouse who makes the payments is not entitled to a tax deduction, and the spouse who gets the payments is not taxed on them.
If the couple have any other joint income, such as an investment property, it should be agreed how the income and expenses are to be split.
After the family home, a pension is often one of the most valuable family assets. Legal advice should be sought to establish if a pension adjustment order (PAO) is appropriate. A
PAO is an order made by the courts, in the case of judicial separation and divorce, designating part of the benefits of a pension to the non-member spouse.
It should be considered whether a single parent credit may be claimed by either spouse. Up to January 31, 2013, both parents could claim an additional One Parent Family Tax Credit of €1,650, depending on circumstances – but since January 1, 2014, this credit was replaced by the Single Person Child Carer Credit. Only one parent can claim it – usually the one with whom the child mostly lives.
Barry Flanagan is a tax expert with Taxback.com
Sunday Indo Business