Relationship breakup

For a couple that are Married or have a Civil Partnership, the tax status for the couple (jointly assessed, separately assessed or singly assessed) before the relationship ends is important.

If you were jointly assessed in the year of separation and you were the assessable spouse, you will be taxed on:

• All of your income for the full year
• Your former spouse or civil partner’s income up to the date of separation
• You can still claim the personal tax credit and PAYE credits for jointly assessed persons and the relevant increased rate band if applicable.

The non-assessable spouse or civil partner will be assessed on their personal income from the date of separation to the following 31 December. They can claim the single person’s tax credit and if they qualify, they may also be entitled to claim the Single Person Child Carer Credit.

For a couple that are separately assessed we look to see who the assessable spouse under joint assessment would be.  Even in a year of separation, a couple that are assessed under separate assessment should have the same tax payable as a couple under joint assessment so tax bands and credits can be moved to ensure this occurs.

For couples assessed under separate treatment, they are treated as single prior to the relationship ending and therefore there is no change to their tax position other than if they qualify for the Single Person Child Carer Credit.

Maintenance payments

An area that can get messy is maintenance payments. Not all maintenance payments are recognised and therefore it is important to look at this before payments are agreed.

There are special income tax rules for couples who are living apart, divorced or have dissolved their civil partnership and certain cohabitants who have ended their relationship.

The maintenance arrangement must be a legally enforceable obligation and made in consideration of the breakup. The paying spouse or civil partner will make the payments gross and will be allowed a deduction against their other income. The recipient will be taxable on this income. This can have some tax benefits if one individual is earning more income than the other as the deduction can reduce the higher rates of USC and income tax and the lower bands and credits of the recipient can be utilised.

An important point that should be remembered is that only payments towards the spouse or civil partner will either be deductible or taxable. Any payments for the benefit of a child will be ignored by both parties.

If both parties sign a joint application and they meet the conditions the maintenance payments are ignored for tax purposes. 

Transfer of assets

Capital Gains Tax

When spouses or civil partners are living together they can avail of a capital gains tax exemption on transfers between them.

When the separation of two spouses becomes permanent, spousal exemption no longer applies to the transfer of assets. However, if the assets are ordered to be transferred by court or under the deed of separation or divorce settlement, these transactions are exempt from capital gains tax. Again, some exceptions apply to this e.g. trading stock or if one partner would not have been taxable on the gain i.e. not resident.

Any transfers between former partners after divorce will be liable to capital gains tax.

It should also be noted that the transfer of assets between co-habiting couples by court order under the Redress Scheme are also exempt from capital gains tax.

Capital Acquisition Tax (Gift & Inheritance Tax)

Unlike capital gains tax above, regardless of not living together while you remain legally married or in a civil partnership, you will be exempt from Capital Acquisition Tax.

If you are divorced or your civil partnership dissolved, a court may order property to be transferred between you. You do not have to pay Capital Acquisition Tax on court ordered property transfers.

If you have any questions in relation to the above, or if you would like to discuss this topic further, please contact a member of the Mazars private client team below:

Published: February 2021