LEGAL SEPARATION AND CO-HABITING COUPLES2019

Speaker: David Clancy

www.clancytax.ie 01-8454044

Agenda

1. Tax implications of various types of relationships

2. Separation and tax consequences

3. Divorce implications

4. Co-habiting couples – rights and tax consequences

5. Other financial implications

Married Couples, Civil Partners & Co Habitants Married – the couple must be living together (two

persons of the same sex or two persons of the opposite sex)

Following the passing of the Civil Partnership & Certain Rights & Obligations of Cohabitants Act 2010, Finance (No.3) Act 2011 generally applies the same tax treatment to Civil Partners as married couples

Cohabitants are treated as Single Persons with specific tax treatments on Court ordered redress

Income Tax 2019

Single €35,300 @ 20%Balance @ 40%

One-Parent Family €39,300 @ 20%Balance @ 40%

Married or Civil Partnership €44,300 or €70,600* @ 20%Balance @ 40%*Restrictions apply (€26,300)

• There are three methods of assessment for married couples:

1. Joint Assessment2. Separate Assessment3. Single Assessment

Basis of Assessment

Joint Assessment

– S1017 and S1018 TCA 1997– Jointly assessed couples are entitled to: Married person tax credit Other tax credits combined Increased standard rate band

– One spouse is the assessable spouse– No need to elect for joint assessment – automatic until it

is revoked – Generally most beneficial

Separate Assessment

S1023 TCA 1997 Each spouse is treated as an assessable person At the end of year any unused personal tax credits and

tax bands may be transferred to the other spouse Aggregate liabilities of the spouses will be the same as if

they were jointly assessed Election must be made not later than 31st March in the

tax year

Single Assessment

S1016 and S1018(4) TCA 1997 Treated as single individuals Any unused tax credits or unused lower rate bands may

not be transferred between spouses To avail of single assessment the couple must make an

election before the end of the tax year in which they wish to avail of it

Year of Marriage

• S1020 TCA 1997• In the year of marriage both individuals are taxed as a

single person• If aggregate of tax paid by them as single persons is

greater than their tax liability if they were treated as married and jointly assessed, they are entitled to a refund of the excess tax

Year of Marriage

The relief is calculated using the formula:A x B

12

A = Additional Tax PayableB = Number of Income Tax months they are married in the tax year

Year of Death

• Where a spouse dies, tax treatment depends on the method of assessment in force.

• Single Assessment – surviving spouse continues to be taxed as a single person and any unused credits/bands are available at the end of the tax year. Can elect for joint assessment before the end of the tax year in which death occurs.

• Joint Assessment – depends on which spouse dies first.

Assessable Spouse/Civil Partner Dies

Taxed on joint income up to death Entitled to married credits/bands Case I/II - Cessation Rules Surviving spouse taxed as single person from date of

death Entitled to widowed person tax credit for year of

bereavement - €3,300

Non Assessable Spouse/Civil Partner Dies

Assessable spouse is taxed on the joint income up to the date of death and on own income until the end of the tax year.

Assessable spouse is not entitled to widowed person’s tax credit in the year of bereavement as is already getting married person’s tax credit.

Capital Taxes & Stamp Duty

Transfers between spouses/civil partners are exempt from: Stamp Duty – S96 SDCA 1999 Capital Gains Tax - S1028(5) TCA 1997

“living together” Capital Acquisitions Tax – S71 CATCA 2003 However, be careful with regard to the assets/tax in

foreign jurisdictions

• Gifts and inheritances between spouse exempt from CAT in Ireland

• Spousal exemption doesn’t always apply internationally

• United States

– Spousal Exemption only applies where spouse receiving a property is a US citizen

– Tax for on-US citizen = threshold $60,000, top rate 40%

Watch the Spousal Exemption Internationally

• Spain – no exemption

• UK– If assets pass from a UK domiciled spouse to a non-UK

domiciled spouse, the amount tax free is limited to the Inheritance Tax Threshold of £325,000 and an amount equal to £325,000 = £650,000

Watch the Spousal Exemption Internationally

• Overseas tax implications should always be considered. Get overseas professional advice.

Key Issue

Legal Separation The Judicial Separation and Family Law Reform Act 1989 When a couple cannot agree the terms by which they live

separately, an application to the Courts for a decree of judicial separation can be made by either party.

The Court must be satisfied that the grounds for the application exist, the couple has been advised about counselling and mediation and proper provision has been made for the welfare of any dependents.

Under Section 2 of the Act, an application for a judicial separation must be based on one of a number of grounds including adultery, unreasonable behaviour, living apart for 1 year, and agreement by parties to decree being granted, living apart for 3 years whether or not both parties agree, or the Court considers that a normal marital relationship has not existed between the spouses for at lease 1 year before the application for the decree (most common ground as neither party has to be shown as being at fault).

Legal Separation If it is satisfied, the Court will grant a decree of judicial

separation. The decree confirms that the couple no longer lives together as a married couple. However, in contrast with a decree of divorce, the spouses are still legally married.

An application for a judicial separation is made to either the Circuit Court or the High Court.

As well as granting a judicial separation, the Court may make ancillary orders, such as: Orders for the payment of maintenance and/or lump sums The transfer of property The extinguishment of a spouse’s succession rights Pension adjustment orders Financial compensation orders

Legal Separation The Court cannot make such orders unless it is satisfied that

arrangements have been made or can be made for the children of the marriage.

Are subject to Stamp Duty on transfer between them in the same way as for transfers between third parties.

Separation

S1025 & S1026 TCA 1997 Couple are deemed living together unless separated by a

Court Order or Deed of Separation. OR

They are in fact separated in circumstances that their separation is likely to be permanent.

Separation

Ua Clothasaigh v Patrick McCartan [1947] ITR Vol 2 Holmes v Mitchell [1991] BTC 28 McA (M) v McA (X) [2000] IR457

Year of Separation If a married couple are not living together they are treated

as separated spouses and taxed as single persons from date of separation.

If jointly assessed prior to date of separation: Assessable Spouse is taxed on joint income to date

of separation and own income after separation. Entitled to married tax credits/bands.

Non Assessable Spouse is taxed on own income from date of separation. Entitled to single credits/bands.

Income Tax on Separation Generally treated as single persons after the year of

separation Option to elect to be treated as a married couple for income

tax purposes:o Must be a legally enforceable maintenance agreemento Both must be resident in the Stateo Joint election in writing signed by both parties before

the end of the tax yearo Maintenance payments ignored

Maintenance Payments to Spouse

Voluntary v Legally Enforceable Voluntary – no tax deduction for payer and recipient

not liable to tax If voluntary payment is over 50% of dependent’s

spouse income - payer can claim married tax credit -“wholly and mainly”

Man dances with joy after making last maintenance

payment

Maintenance Payments

Maintenance payments that are legally enforceable are tax deductible for the payer and are assessed to Schedule D, Case IV in the hands of the recipient.

Also deductible for PRSI and Universal Social Charge.

Payments to Child

Maintenance payments for the upkeep of the child are ignored regardless of the method of taxation and/or whether the payment is voluntary or legal.

Single Person Child Carer Credit Introduced 1st Jan 2014 to replace OPFTC Primary claimant is entitled to a credit in respect of a

qualifying child Primary claimant is not married, cohabiting or in a

civil partnership Not jointly assessed or receiving widowed

person/surviving civil partner tax credit Has a qualifying child residing for the whole or the

greater part of the year (6 months)

Single Person Child Carer Credit

It is possible for primary claimant to allow a secondary claimant to fully claim the credit (100 days)

Qualifying child generally under 18 or over 18 in full-time education

Capital Gains Tax

If couple are no longer living together - spousal exemption does not apply

The parties to the marriage are still “connected persons” and as a result any disposals between the parties will be subject to the market value rule

Revenue Concession in year of separation Transfers under Deed of Separation are exempt from CGT

- S1030 TCA 1997 Transfer of family home

Watch Pregnant Gains !

Asset A Asset B

Market Value € 1m € 1m

Cost €100,000 €900,000

CAT & Stamp Duty

No CAT on transfers between separated spouses

Spousal exemption from stamp duty applies

Dwelling House Relief

S86 CATCA 2003 The individual must:

o Occupied residence as his/her main residence for the preceding 3 years

o Not be entitled to interest in any other dwelling house

o Continue to occupy house for 6 years Post 25th December 2016 relief applies only on main

residence on death

Divorce

No longer legal spouses Option to continue to be treated as married couple for

Income Tax if:o Both are resident in the Stateo Neither spouse has remarried

Transfer under Decree of Divorce not liable to CGT, CAT or SD

Cohabitants Generally treated as single persons for tax purposes. Are assessed to income tax as single persons. Have no option to elect for joint tax assessment and neither

person is entitled to the married tax credit or married tax bands.

Are subject to CGT on the transfers of assets between them in the same way as for disposals to third parties (they do not obtain any benefits spouses have when living together).

Are subject to Group C (Stranger) CAT tax free threshold (€16,250) in relation to gifts/inheritances. (watch free use of property provisions). Children of the relationship are still entitled to Group A (€320,000) threshold in relation to any benefits from the cohabiting parents.

Cohabitation Only same sex couples could enter into Civil Partnerships. Both

opposite sex and same sex couples can become qualifying cohabitants.

Following the commencement of the Marriage Act 2015 on 16th

November 2015 no new civil partnerships can be registered. Couples already in a civil partnership can apply to marry, or remain

in a civil partnership. If they marry then their civil partnership is automatically dissolved.

Cohabitation is on the increase – of the 1.22 million families in Ireland, 152,302 couples are counted as cohabitating (Census 2016) (6% up from 2011).

The Civil Partnership and Certain Rights and Obligations of Cohabitants Act 2010 which came into force on 1st January 2011, was a complete sea change for cohabitating couples.

Cohabitation Historical descriptions of ‘common law wife/husband’

completely erroneously suggest that a couple who never married acquired that status by simply living together and that by living together for a certain period of time, a couple gained rights against each other. This is not the case.

Who is a cohabitant? A cohabitant is one of two adults (whether of the same sex or

opposite sex) who live together as a couple in an intimate and committed relationship.

The interesting ingredients of the definition is that the couple must ‘live together’ so it is more than a dating relationship.

A qualifying cohabitant in the Act means a person who is living with their partner as a couple for a period:-a) Of 2 years or more whether they are parents of one or more

dependent children ORb) 5 years or more in any other case.

Cohabitants Contracts The Act provides that cohabitants may enter into a

cohabitant’s agreement to provide for financial matters during the relationship or when the relationship ends whether through death or otherwise.

Valid only if each received independent legal advice/waived after receiving legal advice.

Agreement in writing and signed by both. General law of contract complied.

The Redress Scheme If a qualified cohabitant satisfied the Court that he or she is

financially independent on the other cohabitant and that the financial dependence arises from the relationship or the end of the relationship the Court may, if it is satisfied that is just and equitable to do so in all the circumstances, make certain redress Orders as appropriate.

The Court has power under the redress scheme to make:- Property Adjustment Orders – the provisions here are identical to the

property adjustment order sections on separation and divorce. Compensatory Maintenance Orders – although called “compensatory”

maintenance, it covers periodical payments and lump sum payments and the periodical payments can be for life and the attachment of earnings mechanism is also available to cohabitants.

Pension Adjustment Orders; The application for provision from the Estate of a deceased cohabitant –

the provision that the court may make shall not exceed the share that a spouse or a civil partner would have been entitled to. Provision made during the life time of the deceased will also be taken into account.

The Redress Scheme Any applications under the redress scheme will be dealt with

in the family court and would be entitled to be held in private. The claim for redress must be made within two years of the

end of the relationship. The court could adjourn the proceeds to assist the parties in

reconciling their differences or trying to reach agreement on terms by mediation or otherwise.

Taxation of Cohabitants - SUMMARY

The Civil Partnership and Certain Rights and Obligations of Cohabitants Act 2010.

Finance Act (No.3) 2011 did not make many changes to the general tax treatment of cohabitants.

Tax relief for maintenance payments under the redress scheme (Section 1031Q TCA 1997).

Mirror tax treatment of Court ordered maintenance or CGT status on Court Orders on the dissolution of the relationship. CGT Relief for disposal of assets under a Court Order (Section 1031R TCA 1997).

No CAT on Court ordered transfers.

Taxation of Cohabitants - SUMMARY

Stamp Duty Relief on transfers under Court Orders on breakup of cohabitants relationship.

Cohabitants have €16,250 Group Threshold. No change to CAT stranger tax free threshold.

Dwelling home. Section 59 CATCA 2003 hardship provision.

Other Issues

Social Welfare

Succession rights

Pensions

Pension Adjustment Orders Pensions is a key asset to consider in many financial

settlements In considering whether PFT/SFT is breached the loss of

benefits under a PAO is ignored Finance Act 2014 amendments for ‘chargeable excess’

when PAO exists The Civil Partnership and Certain Rights and Obligations

of Cohabitants Act 2010 the tax consequences for cohabitants

Thank you for your attention!