Separation & Divorce

Introduction

The purpose of this note is to outline the tax changes which occur when a marriage breaks down. This can be a difficult and stressful time and there will be many issues including financial matters to be considered as a result of the change in your personal circumstances. When you are sorting out your finances it will be important for you to be aware of the taxation implications of any agreements entered into, particularly any legal arrangements. While the tax office will provide every assistance to you in relation to your tax position you may also need to seek professional advice on certain matters.

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Do I need to tell Revenue if I am separated?

YES. You should let your tax office know as soon as possible after you separate so that any necessary adjustments to your tax position can be made. You should state the date of separation and give details of any financial arrangements entered into i.e. maintenance payments to your spouse/child(ren), maintenance payments received by you, mortgage payments etc. You should also forward a copy of any documents governing the separation i.e. deed of separation, court order or maintenance agreement.

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What happens during the tax year in which a couple separate?

Before dealing with the tax consequences of separation, it may be helpful for you to understand how married couples are treated for tax purposes - see Leaflet IT2 (Taxation of Married Persons).

Where a couple separate during a tax year and the separation is likely to be permanent they will be taxed as follows:

Joint Assessment prior to Separation

The assessable spouse, i.e. the person who is chargeable to tax on the couples joint income will be:

  • Entitled to married person's allowance and married rate band for the full year - for details of current rates see Leaflet IT1 (Tax Credits, Reliefs and Rates);
  • Taxed on his/her own income for the full year and the other spouse's income from 1 January to the date of separation.

The other spouse will be:

  • Taxed on his/her own income from the date of separation to the following 1 January
  • Entitled to single person's tax credit and single rate band.

Separate Assessment prior to Separation

Where Separate Assessment applied prior to separation, the spouses will be entitled to transfer unused tax credits and rate bands to each other up to the date of separation only.

Assessment as Single Persons prior to Separation

Where Separate Treatment applied prior to separation there is no change of treatment after separation, each spouse continues to be taxed as a single person.

Maintenance Payments in Year of Separation

If maintenance payments are made, for the benefit of a spouse, under a legally enforceable arrangement during the year of separation then:

  • The spouse who makes the payments will be entitled to a tax deduction for the payments
  • The spouse to whom the maintenance is paid will be taxable on the payments.

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How are separated persons taxed in the years following their separation?

The effect of separation on each spouses tax liability depends mainly on whether there are any maintenance payments involved, and, if so, whether such payments are made under a legally enforceable arrangement or not.

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What happens if there are no maintenance payments involved?

Where a couple separate and no maintenance payments are made, each spouse will be taxed as a single person and will be responsible for filing his/her own tax return and paying tax on his/her own income.

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How are voluntary maintenance payments treated for tax purposes?

Voluntary payments (i.e. payments which are not legally enforceable) are not taken into account when calculating either spouses tax i.e.

  • The spouse who makes the payments is not entitled to a tax deduction for them
  • The spouse who receives the payments is not taxed on them
  • Both spouses are taxed on their own income as single persons.

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If I am making voluntary maintenance payments can I claim the married personal allowance?

Where a spouse:

  • Makes voluntary payments for the maintenance of the other spouse and
  • Is not entitled to a tax deduction for such payments because the payments are not made under a legally enforceable arrangement and
  • The payments are sufficient to either wholly or mainly maintain his/her spouse,

then he/she will qualify for the married persons tax credit but not the married band. The other spouse can also claim single person's allowance against his/her own income (if any).

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What are legally enforceable maintenance arrangements?

These include annual or periodic payments made under an order of court, deed of separation, rule of court, trust, covenant or any other act which gives rise to a legally enforceable obligation. The maintenance arrangement must be made or done in consideration or in consequence of a separation.

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How are legally enforceable maintenance arrangements treated for tax purposes?

Maintenance payments made under a legally enforceable arrangement entered into on or after 8 June 1983 are payable without deduction of tax. The following rules apply to payments made for the benefit of a spouse:

  • The payments are made without deduction of tax
  • The spouse who makes the payments is entitled to a tax deduction for them
  • The spouse who receives the maintenance is taxable on the payments
  • Both spouses are taxed as single persons (unless they opt to be taxed as a married couple).

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Can a separated couple opt to remain taxed as a married couple?

Yes, a separated couple can opt to be treated as a married couple for income tax purposes if:

  • They are both resident in the State and
  • Maintenance payments are made under a legally enforceable arrangement.

The couple must submit a joint election if they wish to avail of this option. The election must be made in writing before the end of the tax year and must be signed by both parties. If such an election is made the maintenance payments are ignored i.e. the spouse making the payments does not get a tax deduction for them and the spouse who receives the payments is not taxable on them.

Where both spouses have income, separate assessment will apply i.e. tax credits and rate bands will be apportioned between the spouses, subject to a review at the end of the year to transfer any unused tax allowances or rate bands.

Where only one spouse has income the full tax credits and rate bands will be given to that spouse.

For details and examples of the different types of assessment see Leaflet IT2 (Taxation of Married Persons).

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How are maintenance payments made to/for children treated?

Maintenance payments made for the benefit of a child(ren) are ignored for tax purposes:

  • The payments are made without deduction of tax
  • The payer is not entitled to a tax deduction for the payments
  • The payments are not taxable
  • The payments are not regarded as income of the child.

Note: each spouse may be entitled to claim pdfIncapacitated Child Allowance - Leaflet IT18 (PDF, 50KB) and/or pdfOne Parent Family Tax Credit - Leaflet IT 9 (PDF, 156KB)

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If I am receiving maintenance payments how will the tax due be collected?

If you are in receipt of maintenance payments and you also have income which is subject to PAYE, it may be possible to collect some or all of the tax due on the maintenance by reducing your tax-free allowances.This can be done by declaring the amount of Maintenance Payements received on our PAYE Anytime service. Further information on PAYE Anytime.

If you are in receipt of maintenance payments only, the tax due is payable directly in one lump sum under the self assessment procedures. In calculating your finances you should take into account the payment of any tax due and the fact that this amount may have to be paid in one lump sum. See Leaflet IT10: Guide to Self Assessment for the Self-Employed andLeaflet IT23: ( Main Features of Income Tax Self Assessment) - for details of how the self assessment system operates.

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What happens if a couple divorce?

Where a couple obtain an Irish divorce the provisions as outlined above will apply to any maintenance arrangements made by order of the Court. This means that:

  • Maintenance payments are made without deduction of tax
  • The spouse who makes the payments is entitled to a tax deduction for them
  • The spouse who receives the maintenance is taxable on the payments
  • Both spouses are taxed as single persons.

A divorced couple also have the option of being treated as a married couple for income tax purposes if:

  • They are both resident in the State and
  • Neither spouse has remarried.

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What is the tax position if the marriage is annulled?

Where a marriage is annulled each spouse will be taxed as a single person from the date of the annulment onwards. There can be no election for joint assessment.

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Can I claim tax relief on mortgage interest which I pay on my separated spouses residence?

Yes, provided you are obliged to pay the interest and the loan is used for the purchase, repair, development or improvement of your spouses sole or main residence. If you are also paying interest on your own principal private residence tax relief will be available on both properties.

The tax relief granted will be subject to the relevant maximum limits - see Mortgage Interest Tax Relief at Source (TRS) - FAQs

What is the position regarding disposal of assets, e.g. family home, in the year of separation / years following separation?

Introduction

Generally, disposals of assets between spouses who are living together are specifically exempted from capital gains tax. These disposals are treated as being made at such a value as gives rise to neither a gain nor a loss for the spouse making the disposal. The spouse who acquires the asset is treated as acquiring it at the cost and on the date on which the other spouse originally acquired it.

Year of Separation

Any assets, including an interest in the family home, transferred from one spouse to the other spouse in the year of separation will be treated as a no gain / no loss for capital gains tax purposes. As a result no capital gains tax liability will arise in the year of separation.

Any losses may be transferred between spouses in the year of separation.

Years following Separation

In the years following a separation further assets may be transferred between spouses without giving rise to any capital gains tax liability. Where this relief applies* each asset will be treated as being acquired at original cost and at the same time as the spouse who originally acquired it.

This exemption does not apply to assets which form or are intended to form part of the trading stock of a trade.

Any disposals from one spouse to the other which takes place after the year of separation or outside of a divorce/court order * are treated as disposals at full market value as if between strangers, and capital gains tax is calculated in the normal way.

* This relief applies where the assets are the subject of an order obtained under one of the following:

  • Part II of the Judicial Separation and Family Law Reform Act
  • Part II of the Family Law Act 1995
  • Family Law (Divorce Act) 1996
  • Deed of Separation

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