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 #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.
Answer: One of the main concerns separating couples have concerns the fate of the family home. If the couple cannot reach an agreement as to who will occupy and own the family home, the court can make an order in relation to it.
An order in relation to the family home is usually applied for when applying for a decree of judicial separation, divorce or dissolution and is referred to as a Property Adjustment Order (PAO).
The PAO will confirm the following:
- Who has the right to live in the family home and for how long
- Who has ownership rights in the family home and what share does each spouse own
In the case of a married couple where there are children, the spouse with whom the children live will often be given the right to live in the family home until the youngest child reaches 18 or 23.
The courts will consider the financial circumstances of each spouse and will also take into account the welfare of dependent children when making a PAO.
- There are a number of possible outcomes that the courts can arrive at when dealing with the family home. For example:
- The house is sold and the proceeds are divided equally or in whatever share it considers just
- The sale is deferred for a specified period of time, often until minor children reach adulthood
- The transfer of the house into the sole name of one spouse
Irrespective of whether the separation or divorce is acrimonious or not, it is of utmost importance that the chosen course of action regarding the family home is formally dealt with and documented. The availability of CGT, CAT and Stamp Duty reliefs on the transfer of the family home between separated spouses or divorced spouses will be dependent on whether assets are transferred under a court order following a judicial separation or the granting of a divorce decree or under a Deed of Separation.
These reliefs were discussed in detail in one of our earlier articles.
If spouses have been separated for some time and then decide to apply for a divorce it is advisable that the issue of the family home is revisited where it is still held in joint ownership.
Couples should be mindful that, any settlement of property made without a court order after a divorce will not be exempt from tax. Stamp Duty, CGT and CAT could apply. Furthermore, for gift tax purposes, they will be deemed to be passing assets to and from strangers in blood and will only be eligible to offset the Class C Threshold (which is currently €16,250) against the value of the gift.
Finally, it is important to be mindful of tax issues that can arise in the future in respect of the family home long after a legal separation has been entered into or a divorce has been finalised.
- The first relates to a future disposal of the family home. It is often the case that the family home will remain in joint ownership until the children reach adulthood. This can apply to both separated spouses and divorced spouses. In these circumstances, it is likely that one of the spouses will have lived outside of the family home post separation/divorce. If the property is subsequently sold at a later date, the spouse that did not live in the property for its entire period of ownership may be subject to Capital Gains Tax on any gain arising on disposal. Principal Private Residence relief may be available in respect of a portion of the gain based on the number of years they occupied the property as their PPR, however they will not be eligible for full relief. The spouse that resided in the property for the entire period of ownership should be entitled to avail of this relief such that a liability to CGT should not arise.
- The second issue relates to the death of one of a former spouses where the family home is still in joint ownership. Where the family home is retained for an extended period of time post-divorce and the ownership is by way of joint tenancy, the death of one of the former spouses will result in the house passing to the surviving former spouse. The surviving former spouse, could be faced with an unexpected inheritance tax bill as they would no longer be eligible for spousal exemptions from CAT.
Given the complexities surrounding the family home, we recommend that clients seek both legal and tax advice in relation to this asset. With a little bit of forward planning at the outset the above issues can be addressed and more tax efficient solutions can be identified.
Read the answers to the rest of our tax series on separation, divorce and tax:
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?
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?
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.