Divorce, wills, family businesses and tax – your questions answered

Divorce and personal tax - Crowe Ireland

Crowe’s head of Private Client Services, Maeve Corr, answers Sunday Independent readers’ questions on wills, family businesses and other personal finance matters related to divorce and separation.

The following is an extract from the 4 November 2019 edition of the Sunday Independent.

Wills and divorce

Question: My wife and I are in the process of getting divorced. We have three children. I have a will which I made a few years ago. Do I need to update this following the divorce or is it automatically rescinded? If I update this will following the divorce, could I still leave some of my inheritance to my ex-wife – and if I can, how would I do so without triggering a huge inheritance tax bill for her? John, Co Cork

Answer: Divorce does not automatically revoke your will, but your ex-wife’s rights under the Succession Act will change.

In addition, the taxation of transfers between you will be treated differently. While transfers between spouses are tax-free, following the divorce, you will no longer be considered to be spouses, but any settlement on foot of a legal separation, court order or decree of divorce will be treated as non-taxable.

Be mindful that any transfer of property made without a court order after a divorce will not be exempt from tax.

Furthermore, you will be deemed to be passing assets to a stranger and will only be eligible for the Class C threshold (currently €16,250) for gift tax purposes.

If you wish to provide for your ex-spouse, you might use the annual small gift tax-free allowance of €3,000. Your former wife would not be liable for gift tax on any annual gift of €3,000 received from you – and from a tax perspective, this will not affect any other gifts or inheritances received by her. Alternatively, if the court order provides, you could include a provision for your ex-spouse in your will – however, the legal drafting of this is very important.

Family pub tax issues

Question: My wife and I are getting divorced. We have four adult children. We have run a family business (a pub) together for more than 20 years. My wife will no longer be involved in the business after we divorce, though I would like to carry it on, and some of my children would like to continue working there. My wife, as co-founder and co-owner, wants me to buy out her share. How could I do that without damaging the ability of the business to carry on in the future? I don’t have much cash in the bank. Our only assets are the family home and the family pub. Harry, Dublin

For the purposes of this question, we are assuming that the family business is run through a company.

Answer: Where the business is profitable and has sufficient cash and distributable reserves, there are a number of options available. As your wife worked in the business, it may be possible for the company to make an ex-gratia termination payment to her in a tax-efficient manner. Depending on the annual salary earned by your wife and the years of service, a tax-free payment of up to €200,000 can be made in this manner.

Another option might be for the business to buy back your wife’s shares, where there are sufficient distributable reserves in the company. Where certain conditions are met, the buy-back may be subject to capital gains tax (CGT) treatment, as opposed to income tax treatment. This would mean tax at 33% versus an effective rate of 52% respectively. Retirement relief might be available to your wife to reduce her tax cost to nil – once certain conditions are met. Another relief which your wife might qualify for is entrepreneur relief. This provides for a reduced 10% rate of CGT on the gain on the disposal of her shares, subject to certain conditions.

Bank funding or raising funds through other sources could be explored to facilitate the above options. It is important that the appropriate legal and taxation advice is sought where you are considering any of the above options.

Maintenance & divorce

Question: I have been living with my husband for more than 40 years. During that time, I have been financially dependent on him as I stayed at home to rear our children, and never returned to the workforce. My husband is a wealthy man, so we have never been short of money. My husband recently announced he wants a divorce – and that he will be leaving the country. We have both agreed I will continue to live in the family home. I will also be entitled to maintenance when we divorce. How will the maintenance be taxed? If my husband is non-resident, how will that affect the tax situation of the maintenance payments? Mary, Co Meath

Answer: It is important that legal advice is sought and the appropriate arrangements are made, under a legally enforceable maintenance arrangement, to include payments made under a court order, deed of separation, trust, covenant or any other act which gives rise to a legally enforceable obligation.

Divorced parties are no longer legally spouses, so they are no longer eligible for tax reliefs available to married or separated couples. If your ex-spouse makes legally enforceable maintenance payments, he will be entitled to a tax deduction for these payments. We recommend that he contact the Revenue Commissioners or his professional adviser in relation to his tax position.

In relation to you receiving maintenance, assuming these are legally enforceable maintenance payments, you are liable to tax on these. Income tax, Universal Social Charge and PRSI will be due on each payment.

Where you are in receipt of legally enforceable maintenance payments, you are deemed to be a chargeable person and must submit an income tax return each year, even where you are not in receipt of any other income.

It is important to consider your PRSI position and what future social welfare entitlements you may be eligible for.

As an alternative to the above, separated or divorced spouses may choose instead to be taxed as a married couple.

However, as we understand that your husband will not be resident in Ireland, this would not be available to you.

It is important that you consider what your long-term intentions for the family home are. If the property is simply transferring to you on foot of the divorce, there are no tax implications. There are further complications where you both remain as owners of the property, as this will no longer be your husband’s principal private residence.

If he was to transfer the property to you at a future date, this may give rise to a capital gain, which could result in tax on the gain at 33% for him on his portion of the gain. There are some reliefs that may be available that would need to be explored at the time. If this falls outside your divorce settlement, you may also be liable to gift tax.

It is important to remember that any property transfer made without a court order after a divorce will not be exempt from tax. Furthermore, the individual will be deemed to be passing assets to a stranger, and so the recipient will only be eligible for the Class C threshold (€16,250) for gift tax purposes. Beyond this threshold, any gift or inheritance attracts tax at a rate of 33%.

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.

Personal tax and divorce - Crowe Ireland