Tax Consequences of marital breakdown

The breakdown of a marriage is a stressful time but it is important to consider the resulting tax implications.

Income Tax

Once you have separated each of you reverts, for tax purposes, to single assessment. Each party can claim a one parent family tax credit and the single parent rate band as long as you have not remarried or are not cohabiting. If you are the non-custodial parent you must ensure that the separation agreement records that the children can and do stay with you for at least one night of the year.

If one spouse makes payments for the benefit of the other spouse under a legally enforceable maintenance arrangement, then:

  • the spouse making the payments is entitled to a tax and USC deduction for the payments and
  • the spouse who receives the maintenance is taxable on the payments.

This does not apply for maintenance payable in respect of children or for voluntary maintenance payments.

The meaning of separation for tax purposes

Both factual and legal separations are considered separations from an income tax and CGT perspective. However, only divorce impacts on the spousal exemptions from CAT and stamp duty.

Income Tax

A husband and wife are treated as “living together” unless they are separated:

  • under a court order or by deed of separation, or
  • in such circumstances as are likely to be permanent.

In general Revenue will consider a separation to be permanent if the couple is living apart by mutual consent or due to their circumstances and the separation has continued for a considerable period of time, usually taken as a minimum of one year.

Capital Gains Tax (CGT)

A couple must be married and “living together” in order to avail of the inter-spousal exemption from CGT. A transfer under a court order or formal deed in relation to a separation or divorce is exempt from tax. If you are living apart under an informal agreement, a disposal to your ex-spouse will trigger a CGT liability. To avoid this, ensure asset transfers happen while you are still living together or as part of a formal separation agreement.

Capital Acquisitions Tax (CAT)

A gift or inheritance from your spouse is exempt. A legal or factual separation does not affect this exemption for individuals whose marriage at the date of the gift or inheritance is recognised as valid inIreland. A transfer under a court order or formal deed in relation to a separation or divorce is also exempt.

Stamp Duty

The stamp duty exemption available for transfers between spouses is affected by a divorce but not by a legal or factual separation. A transfer under a court order or formal deed in relation to a separation or divorce is also exempt.

Other points to note

The taxation rules of separated couples are not altered by the fact that one spouse may be non-Irish resident.

The extent to which non-resident separated spouse in receipt of maintenance payments is liable to Irish tax will depend on whether or not there is a Double Tax Agreement  between Ireland and his or her country or residence.

If the separated spouse making the maintenance payments is not Irish tax resident but the recipient spouse is, then the income is taxable inIreland.