Your guide to the tax issues associated with separation & divorce.
With the countdown to the divorce referendum well under way, our tax and private client experts answer some of the more common questions clients have when it comes to the impact separation and divorce has on their tax liabilities. Whatever the outcome of the referendum Irish couples face complex tax rules and issues with regard to separation and divorce. Here we answer some of the more frequent queries we receive.
Question #3: My spouse and I recently separated. We are currently negotiating a maintenance agreement for the benefit of my spouse and our children. How do we quantify our maintenance needs and agree on an appropriate level of payment?
Answer: Achieving financial freedom following the breakup of a marriage can be difficult. At the time of family law proceedings, both parties must provide full disclosure of their financial circumstances by completing an Affidavit of Means. An Affidavit of Means is a compilation of Income, Assets Liabilities and Outgoings. Information disclosed on this document must be vouched and verified. Even if you are not using the courts to settle the terms of a separation, you may still find it helpful to use the Affidavit of Means to assist with quantifying your maintenance needs. The Affidavit of Means contains 6 Schedules which addresses the following areas:
- Details of all Assets (family home etc.)
- Details of all Income Receivable
- Details of all Debts and Liabilities (loans etc.)
- Details of all Weekly Outgoings (shopping, car etc.)
- Details of Life Insurance Policies
- Details of Pension
It is important to identify the family’s annual spending requirements and then establish how these will be funded. Having a clear understanding of the makeup of the family asset portfolio will assist in achieving this. The agreed maintenance payments must be realistic and sustainable, having regard for the income that is available.
As a starting point you should review and categorise your expenses for the past 6 to 12 months. Often the basic expenses are overlooked. In our experience spouses going through separation may no longer be living together so they will need to take into account the costs associated with running two households. Outlined below is a list of common expenses that should be identified:
- Utilities – light and heat, grocery bills, phone, internet and TV
- Home – mortgage / rent, maintenance of the property, household insurance, waste disposal, security etc.
- Debt funding
- Pension funding
- Cars – cost of fuel, insurance, tax, maintenance
- Medical – medical bills, prescriptions, insurance costs
- Children – school fees, activities, transport, clothing and general living costs etc.
- Specific expenses – e.g. in relation to dependents, be they children or other family members
- Special occasions – birthdays, Christmas, holidays. What should be allowed, what’s the real cost? We are not suggesting lavish expenditure, rather take a realistic view of what should be allocated to these events.
Secondly, we recommend that you review and identify your discretionary expenditure. Often in a breakup this is one of the more contentious issues. What’s considered a discretionary spend to one spouse, may not be considered discretionary to the other. Regardless of your view on what constitutes discretionary expenditure, it is important that each spouse identifies their normal level of discretionary spending. This can be anything from expensive gym or club memberships, to shopping, to luxury holidays or cars.
- Holidays – assess the cost, what are the anticipated future costs?
- Cars – review expenditure and agree a budget for replacement / upgrades
- Other interest – hobbies, sports memberships etc. – identify monthly / annual costs of these items
Dividing the costs
Once the basic and the discretionary expenditure has been identified, it will be necessary to allocate these costs between your spouse and your children. Typically, maintenance in relation to children will cease when they have completed their full time education or reached a certain age. It is important to ensure the expenses are allocated to the appropriate group, for example are the expenses specifically related to the children or are they more general expenses associated with running the house?
Agreeing an appropriate annual payment amount
Once the financial needs of your spouse and children have been identified it will be necessary to determine whether there is sufficient income to meet these needs whilst also providing for oneself.
When agreeing an appropriate payment amount you should consider the following:
- Are both spouses earning?
- Where one spouse is not earning at present, do they have the ability to work in the future?
- Will your financial position change in the future?
Getting the simple things sorted, like setting up bank accounts, transferring assets, reviewing who the beneficiaries are on pensions and life policies should be done as soon as possible.
Consider if changing mortgage provider will impact your costs? Can you retain your current interest rate?
Planning for the future
Planning for the future is critical at this time. As you approach retirement your needs and indeed your income levels may change. It is important to consider how you will fund your retirement and care in later life.
The pension pot is often the second biggest asset after the family home.
On retirement, will your pension be sufficient to meet your maintenance obligations and provide for your own financial needs?
Pensions and specifically Pension Adjustment Orders will be covered in more detail in a later article.
Finally, before any settlement is agreed we recommend that a cash flow analysis is carried out and that you stress test your maintenance obligations against future fluctuations in income levels.
Over time your needs will change as will your financial position, be sure to review your position on an ongoing basis and consider how these changes will impact on your standard of living.
Read the answers to the rest of our tax series on separation, divorce and tax:
Question #4: My spouse and I are separating. As she has not worked outside the home it has been agreed that I will provide her with a monthly allowance. How will this maintenance payment be treated for tax purposes?
Question #5: My spouse and I are separating and are concerned about how the family home will be dealt with as part of the proceedings. We may also seek a divorce at some point in the future, how will this impact the family home.
When it comes to tax, the implications of informal separation, formal separation and divorce are different and can be complex. If you have any questions, please contact a member of our tax or private client teams.