Wednesday 28 September 2016

Counting the costs of separation

Martin O'Sullivan

Published 07/09/2016 | 02:30

Separation can be costly
Separation can be costly

Marriage breakdown is as prevalent within the farming community as it among our non-farming brethren.

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Apart from the myriad of issues that separating couples face, taxation can have an important bearing on asset disposal and maintenance payments.

The manner in how the various taxes will impact can depend on the nature of their separation.

A couple are considered separated for tax purposes if the separation is likely to be permanent or it has been made legal.

Income tax

Once a couple are no longer living together they are no longer entitled to joint assessment, except for the year of separation, unless there are legally enforceable maintenance payments in which case they can elect to be jointly assessed.

The income tax treatment of the respective spouses will depend on whether there are legally enforceable or voluntary maintenance payment agreements in place.

Voluntary maintenance payments are payments that are not legally enforceable and are not taken into account when calculating either spouse's tax liability. The following rules apply:

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.

Maintenance payments for children are ignored for tax purposes

However it should be noted that if the voluntary payments are sufficient to wholly or mainly maintain the spouse, the payer will be entitled to claim the Married Person's Tax Credit but only the single person's standard rate band is due.

The spouse receiving the payments can also claim single person's tax credit against his/her income (if any).

Legally Enforceable Maintenance Payments include annual or periodic payments made under a deed of separation or decree of divorce or a court order which gives rise to a legally enforceable obligation.

The maintenance payments must be in consideration of or in consequence of a separation. The following rules apply to maintenance payments made under a legally enforceable arrangement for the benefit of a spouse or former spouse:

The payments are made without deduction of tax.

The spouse who makes the payments is entitled to claim relief from income tax and USC in respect of the maintenance payments made.

The spouse who receives the maintenance is taxable on the payments.

Both spouses are taxed as single persons

Maintenance payments for children are ignored for tax purposes.

It should be noted that since 2014 the Single Persons Child Carer Credit worth €1,650 may be claimed by a parent who has custody of a child for the whole or greater part of the year.

This individual is known as the primary claimant.

The primary claimant may relinquish his or her entitlement to this tax credit in favour of a secondary claimant if he or she wishes to do so.

Maintenance payments for children

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.

Capital gains

Capital gains tax is a tax on the profit made on the disposal of any asset and is payable by the person making the disposal. Disposal can be by way of gift or sale. Transfers of assets between spouses are exempt from capital gains tax.

Transfers of assets between spouses who are separated are exempt from capital gains tax if they are made under a Separation

Agreement or a court order. From the date that the separation is likely to be permanent, any transfer of assets between spouses is not exempt from capital gains tax.

Similarly transfers of assets between spouses pursuant to a court order in a Divorce Decree are exempt but transfers of assets subsequent to the granting of the Decree that are not ordered by the court are not.

It is also important to note that where property is sold by one spouse in order to raise funds to meet the terms of a court judgement or an out of court settlement, such disposals will be subject to Capital Gains Tax.

Separating couples should always seek specialist tax advice before entering into arrangements that have capital gains tax implications.

Capital acquisitions

Transfers of assets between spouses whether by way of gift or inheritance are exempt from capital acquisitions tax. Separation does not affect this exemption but divorce does.

Transfers of assets pursuant to a court order in a Divorce Decree are exempt but transfers of assets subsequent to the granting of the Decree of Divorce that are not ordered by the court are not exempt.

Stamp duty

Transfers of property between spouses are exempt from stamp duty. Transfers of property between spouses who are separated or divorced are exempt from stamp duty if they are made pursuant to a court order.

PRSI

Spouses who pay legally enforceable maintenance under a formal separation agreement are entitled to relief from PRSI on maintenance payments made. The spouse in receipt of such maintenance payments is liable to PRSI on the amount he or she receives.

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