Crowe’s head of Private Client Services, Maeve Corr, answers Sunday Independent readers’ questions on the tax and pension implications of divorce and separation.
The following is an extract from the 7 July edition of the Sunday Independent.
Question: My husband and I will soon be getting divorced. We are on good terms with each other and the divorce has been amicable. One of my primary concerns at the moment is that neither of us ends up out of pocket after the divorce, as a result of tax. What steps can I take to ensure that neither of us loses out with tax? Emma, Co Louth
Answer: It’s important that the divorce is formally documented – such as through a decree of divorce – and that this document is shown to the Revenue Commissioners. This is particularly important if maintenance will be paid for the children or to one of the spouses.
Where maintenance is paid, the spouse paying it will be entitled to a tax deduction as a result of those payments – but only if they are legally enforceable. In such cases, the spouse paying the maintenance can have their standard rate band (the amount at which they pay tax at 20pc) adjusted to take account of the amount they pay.
Maintenance payments which are made for the benefit of a child or children are ignored for tax purposes – in other words, the individual making the payment does not receive any tax relief and the individual receiving the payment on behalf of the children does not pay any tax on it. However, the portion of maintenance which is paid for the benefit of a spouse is taxable.
So, for example, if a spouse is paying €5,000 in maintenance, of which €3,000 is for the benefit of the children and €2,000 is for the benefit of a spouse, the €3,000 received for the children is disregarded for tax purposes.
But the €2,000 received by the spouse is taxable. The spouse making the payment will receive a tax deduction for the €2,000 only.
Voluntary maintenance payments (payments which are not legally enforceable) are not taken into account when calculating either spouse’s tax.
So with voluntary maintenance payments, the spouse who makes the payments is not entitled to a tax deduction for them, and the spouse who receives the maintenance payments is not taxed on them.
Therefore, with maintenance, it’s important to have a formal divorce agreement in place – otherwise, the spouse making the payments could be out of pocket as they won’t be entitled to a tax deduction.
If the responsibility for the care of children falls to one parent after the divorce, that parent should notify the Revenue Commissioners of his or her change in circumstances – and that he or she is now a single parent.
By doing so, he or she can increase their standard rate cut-off point (the point at which income is taxed at the higher tax rate) from €35,300 to €39,300, and he or she will also be entitled to the single person child carer credit, which is currently worth €1,650.
It’s worth noting that even though you’re divorced, you still have the option to continue to be assessed jointly for tax.
You, however, may not wish to continue to be assessed jointly for tax purposes after you divorce.
Either way, you could find that your after-tax pay isn’t that much different if you are no longer assessed jointly for tax after you divorce. For example, if you have a situation where the husband and wife previously had the benefit of a married tax credit, if the husband is paying maintenance and getting a tax deduction for the maintenance, his after-tax pay may work out the same as it was before the split. The wife in receipt of maintenance (for her benefit), however, will be taxed on that maintenance.
Be very careful how you transfer assets between each other when divorcing.
There are a number of tax reliefs available to married couples which exempt them from capital gains tax (CGT), capital acquisitions tax (CAT) and stamp duty on the transfer of assets.
Divorced spouses are no longer legally spouses, so they are no longer eligible for tax reliefs available to married or separated couples.
However, the transfer of assets between spouses on foot of a court order in a decree of divorce will be exempt from CGT, CAT and stamp duty. It’s therefore important that you make sure you get these tax exemptions when transferring assets between you. Be mindful that any settlement of property made without a court order after a divorce will usually not be exempt from tax.
Pensions and divorce
Question: My husband and I are getting divorced. We have been married for more than 30 years. My husband has a valuable pension as he has worked in the same job all his life. I, however, will only be entitled to the state pension, as I spent most of my working life looking after children and have largely been financially dependent on my husband. We are getting a pension adjustment order (PAO) so that I get a proportion of my husband’s pension. What happens to the pension following the PAO? Can I set up my own pension scheme with my portion of the benefit? Sarah, Dublin City
Answer:Following the PAO and the division of the pension by the trustees, you can either leave the pension where it is – in your spouse’s scheme – or you can transfer the benefit into your own name.
If you decide to leave the benefit where it is, you will only be entitled to the relevant retirement pension payments at the time your spouse accesses his pension – however, you may benefit where benefits are linked to salary.
Under this route, you do not have the option to take the retirement benefits independently of your spouse. Different retirement options can apply, depending on the type of pension scheme.
You also have the option of establishing your own pension benefit. This will allow you to manage your retirement benefits separately from your spouse.
In addition, this option allows you to access the benefits on your own terms, subject to meeting the conditions of the pension scheme at retirement. The date you can access your retirement benefit will depend on your age and the type of pension. You can independently choose how you wish to access your retirement benefits – you don’t have to access your retirement benefit on the same terms as your spouse. For example, where your spouse chooses the lump sum and annuity option, you choose the lump sum and approved retirement fund (ARF) option, in respect of your share of the pension fund.
An ARF is a personal retirement fund where you can keep your money invested after retirement, as a lump sum. With an annuity, a life assurance company guarantees to pay you an annual income for the rest of your life.
Carefully consider both options before you make a decision. Also be cognisant of the impact of your husband’s death, should he die before the pension benefit is transferred into your name or before the benefits are drawn down.
Finally, if your husband’s pension is close to the €2m cap (a limit on the total capital value of pension benefits that an individual can draw from tax-relieved pension arrangements), or indeed likely to reach it, you should get specific advice.
For additional information on divorce and tax or pensions, or any personal tax matters, please contact Maeve Corr or a member of our tax team.