Wednesday 19 June 2019

Weighing up the financial cost of divorce can never be a rush job

Divorce is a major catalyst, along with death and disease, for changing people's fortunes for better or worse
Divorce is a major catalyst, along with death and disease, for changing people's fortunes for better or worse

Catriona Coady

Another year, another referendum. On Friday, Irish voters will once again be asked to amend the Constitution on a key social issue that has deep implications for family relationships. Yet unlike the recent referendums on marriage equality and abortion, this week's vote on liberalising the divorce regime has barely stirred an opinion among the electorate.

The result seems like a foregone conclusion, with polls putting support somewhere around the 80pc mark. In fact, the 'yes' side seems to be such a dead cert to win that 'no' voters are barely bothering to campaign against the change.

Clearly, divorce is a less controversial subject than it was in 1995 when Ireland decided - by the barest of margins - to allow couples to dissolve their marriages once they had been living apart for four years out of a five-year period. The plan to remove that restriction and legislate for a shorter, two-year waiting period seems both reasonable and compassionate.

Yet the lack of debate and passive consensus around this referendum means that some of the consequences of the proposed reform have not been properly examined. While the benefits are clear, I fear some significant costs will remain hidden until they become problems for divorcing couples.

In my line of work, financial planning, we talk about the Three Ds - death, disease and divorce - as being the major catalysts for changing people's fortunes, for better or worse. A death in the family triggers an inheritance; disease prompts a sale of the family business; divorce entails a division of joint assets.

None of these life events is simple to navigate, either emotionally or financially. But divorce might be the most challenging due to the conflict inherent in most marriage breakdowns and the technical difficulties of arriving at an equitable financial outcome for both parties.

Financial planners see it up close. Even in divorces where there is little acrimony, dividing up wealth and property is a delicate process.

To take one example: pensions are often viewed as the next most valuable asset in a divorce after the family home. But carving out assets and benefits from a pension by means of a pension adjustment order during divorce proceedings is fraught with technical complexity requiring informed advice, sensitive handling and time. Given that the tax implications arising from pension adjustment orders can persist for many years to come, the arrangements should in no way be rushed through.

Having half as much time to make life-altering decisions regarding very valuable financial assets such as pensions can make it twice as hard to get it right.

Although requiring couples to wait a minimum four years to get on with their lives is not fair, rushing them through a process without clear financial guidance could create significant complications that last far beyond the separation period and divorce process. It would be a bad outcome indeed if parties to divorce felt compelled to come back to court for a 'second bite' due to an unsatisfactory financial resolution of a marriage breakdown.

There is an opportunity for legislators to address this important issue when drafting the new laws governing divorce and to take account of the potential of needlessly destroying personal wealth or leaving vulnerable people with less than they deserve.

These are issues that will unfold long after the referendum is over, but they could prove far more practically significant in reality than the important principles at stake in changing the wording of the Constitution.

Taxing times on incentives

It's almost a cliché that business owners get all kinds of special tax benefits. Whether it's being able to write off expenses or to take advantage of special government tax-relief schemes, there is a widely held view that if you own a business, the tax system works for you.

It's easy to see how people come by this impression. After all, every year at Budget time, the Finance Minister serves up an alphabet soup of incentives for entrepreneurs and shareholders - EII, KEEP, SURE etc.

The intention behind these efforts is good. The Government wants to encourage people to start and grow businesses.

Creating tax and financial incentives to do that can help, either by making it easier to attract investment and funding, or by making it potentially more lucrative to sell a business or pass it on to the next generation.

These efforts need to be properly calibrated to be truly effective.

Unfortunately, the schemes can sometimes be so administratively complicated and bureaucratically onerous that they discourage take-up. Or the incentive isn't attractive enough to make it worth the effort to apply. Anyway, this is what I hear from business owners. And now, it seems, the Government has heard it too.

Three key public consultations have been announced by the Department of Finance looking at tax incentives that are highly relevant and valuable to the SME sector. The Government is looking for stakeholder views on entrepreneur relief, the Employment and Investment Incentive (EII), which encompasses the Start-Up Refunds for Entrepreneurs (SURE) and the Start-Up Capital Initiative, and finally the Key Employee Engagement Programme (KEEP).

A deadline of May 24 - this Friday - has been set for interested parties to express their views, to allow for preparation for Budget 2020 and the next finance bill. A stakeholder consultation event will be held in Dublin on June 6.

This consultation is a welcome development.

While clear conditions are important to protect the integrity of tax incentives and the tax system, conditions that are too strict or inflexible effectively lock most businesses out and can discourage entrepreneurship.

Most of the calls for reform of entrepreneur relief, which allows for a 10pc capital gains tax rate on disposals of qualifying business assets, have related to the €1m lifetime limit on gains.

This restriction was widely anticipated to change in Budget 2019, allowing for a higher ceiling and, thus, a greater incentive for serial entrepreneurs to sell and start up again. Other, more subtle and subjective, conditions make it hard to qualify this relief, too, such as how to demonstrate and satisfy the working time.

This can often lead to a reluctance to even try to claim the relief due to the fear that a Revenue auditor could take a different view about how this condition should be interpreted.

On EII and the related schemes, comparisons between the Irish reliefs and the equivalent reliefs in the UK have typically been the standard complaint. However, the focus over the last couple of years has been to streamline the application process to make the conditions easier to satisfy. There is still a widespread view that there is more work to be done.

Finally, KEEP is a share incentive scheme which allows employers to award share options to employees tax efficiently. While under normal rules the exercise of a share option would attract income tax, USC and PRSI, this doesn't arise where the option qualifies under KEEP.

A charge to CGT however arises on a disposal of the shares acquired under this share option scheme. Again, much of the difficulties arising under this incentive relate to conditions which are difficult to satisfy, and this has resulted in low take-up on the scheme.

Getting these subtleties wrong can be a barrier to entrepreneurship and, thus, to growth in the indigenous economy. It is only natural to make comparisons with the equivalent incentives available under the tax system of the UK. In a Brexit world many entrepreneurs are expressing concern about maintaining competitiveness, which brings the perceived weaknesses in the Irish tax system into sharp focus. It's imperative to get this right.

Catriona Coady is senior tax and pension specialist with Goodbody

Sunday Indo Business

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