Taxation of Spouses, Civil Partners and Cohabiting Couples

Did you know that since 2011 Civil Partners have the same rights as married couples. For co-habiting couples they continue to be treated as single persons.

The Civil Partnership and Certain Rights and Obligations of Cohabitants Act 2011 came into effect on 1st January 2011. Parity of tax treatment was extended to Civil Partnerships in 2011.

We will look at how couples are treated for tax purposes across the four main tax heads, Income Tax, Capital Gains Tax, Capital Acquisition Tax and Stamp Duty.

Finally, we will consider the tax implications of the breakdown of a relationship involving separation, divorce and dissolution of a civil partnership.

INCOME TAX

Cohabiting couples, unfortunately, do not enjoy the same rights as married couples and civil partners, therefore in the text below any reference to “couples”, refers specifically to Married couples and Civil Partners. We will make specific reference to Cohabitating couples where relevant.

Couples in Ireland have an option as to how they wish to be assessed for tax:

  • Joint Assessment – as a married couple living together,
  • Separate Treatment (also known as single assessment) – as if they were single OR
  • Separate Assessment – similar to joint assessment but each spouse’s tax affairs are dealt with independently.

Revenue will automatically treat a couple as being jointly assessed if living together.

With joint assessment all the income of the couple is assessed in the name of the spouse earning the greater income; this is determined in the year of marriage. However, it is possible to have this changed on contacting the Revenue before 1st April in the tax year.

As a jointly assessed couple the married person’s tax credit is available (currently €3,300) and an increased Standard Rate band (currently a maximum of €43,550), although this is dependent on the earnings of the other spouse.

Joint assessment is normally the option which results in the best use of all credits and allowances.

Separate assessment grants the same level of tax credits and tax band as Joint assessment, however, each person is dealt with separately. The optimal allocation of credits would normally take place at the end of the tax year.

Separate treatment is the same as Single Assessment where one is taxed as a single person; the married tax credit cannot be claimed and there is no sharing of the standard rate tax band. This would normally result in the couple paying more tax. For example, in a situation where one spouse doesn’t earn sufficient income to fully utilise the standard rate band and tax credits.

Tax treatment on the death of a Spouse or Civil Partner – when the couple are Jointly assessed

If the assessable spouse dies:

  • The couple’s joint income to the date of death will be assessed with all married allowances being granted for the full year.
  • The surviving spouse’s income from the date of death will be assessed with full single person allowances and a Widowed Person allowance, currently €1,650.
  • Note that the allowances are available for the full year irrespective of the date of death.

If the non-assessable spouse dies:

  • The assessable spouse is assessed with full married person reliefs for the year. 
  • The assessable spouse doesn’t receive the widowed persons allowance as they claim the married persons allowance for the full year. 

Year of marriage relief

In the year of marriage a couple (including civil partners) are taxed as single persons, however, there is some relief available which gives the couple the benefit of the married persons reliefs and credits based on how many months of the year they are married.

An important point to note regarding this relief is that if married at any time in the month then Revenue treat this as being married for the full month. Therefore from a tax viewpoint it would be preferable to be married on 30th June as opposed to 1st July i.e. this is treated as being married for 7 months instead of 6 months.

Other less commonly known Revenue reliefs/ concessions relate to:

  • No cessation of a trade/ business if the business is passed to the surviving spouse.
  • Availability of Married Allowance when only one spouse is tax resident in Ireland.
  • Aggregation Relief provides relief for the difference in tax payable between separate treatment and joint assessment. In a situation where both spouses have income but only one spouse is tax resident in Ireland then a portion of the joint tax band and tax credits may be awarded.
  • Single person child care credit is available to a divorced or separated spouse if the child lives with them for all or the greater part of the year. The qualifying child must be under 18 or over 18 and in full-time education. The credit is not available to a spouse who is cohabiting. 

CAPITAL GAINS TAX (CGT)

CGT applies to gains made on chargeable assets, typically the sale of land, buildings and shares.

Joint assessment will apply for spouses living together however an election may be made for single assessment before 1st April 2017, for 2017. Joint assessment means gains will be calculated separately for each spouse but assessed on the husband. A capital gain for one spouse may be offset against a capital loss of the other spouse.

Transfers of assets between married couples and civil partners are not subject to CGT. Instead, the receiving spouse is deemed to acquire the asset at the original cost and acquisition date of their spouse.

In the case of separated spouses and cohabitants, a similar exemption will apply however this is only in the case where an asset is transferred as a consequence of a legal order ending a relationship between a couple or cohabitants.

Principal Private Residence (PPR) relief for the sale of a family home for married couples and civil partners can only apply to one home. Therefore in a case where there are two properties owned by the couple they must notify Revenue as to which home they wish to have treated as their PPR. 

CAPITAL ACQUISITIONS TAX (CAT)

CAT is a tax which applies to gifts and inheritances received from another person, referred to as the donor. Gifts and inheritances between spouses and civil partners are exempt from CAT.

STAMP DUTY

Stamp duty applies to legal documents effecting the transfer of property.

No stamp duty applies to the transfer of property between, spouses or Civil Partners.

TAX TREATMENT IN RELATIONSHIP BREAKDOWNS

Both parties will be treated as single persons in the year following separation, divorce or dissolution.

Legally separated spouses may elect to be Jointly assessed provided they both remain tax resident in Ireland and maintenance payments are being made.

Divorced couples and former civil partners may also opt for Joint Assessment provided that they both are tax resident in Ireland and remain unmarried, or have not entered into a new Civil Partnership.

Note that being assessed as a single person will never be as beneficial as being Jointly assessed. Therefore this option should be considered when available.

Any change in the way a couple wish to be assessed must be notified to the Revenue within a 6 months window between 1st October of the previous year and 31st March in the year of assessment e.g. for 2017 from Oct. 2016 to 31st Mar. 2017.

For CGT purposes any property transfers between spouses or civil partners in the year following divorce or separation will be taxable as the couple are no longer married or living together. The exception would be where the transfer is part of the terms of a court order or decree of Separation or Divorce.

For CAT purposes separated couples are still married therefore the spousal exemption continues to apply. Following a divorce or a dissolution of a Civil Partnership, the spousal exemption ceases, however, any transfers on foot of the terms of the Decree of Divorce/ Dissolution will be exempt from CAT.

For Stamp Duty transfers between spouses are exempt, even if the couple is separated. This exemption ceases only on Divorce/ Dissolution, however, any transfers on foot of the terms of the Decree of Divorce/ Dissolution will be exempt from Stamp Duty.

 

Should any of the above points be relevant to you please contact The Tax Man who will be happy to assist.

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