My wife and I have recently separated and I now require guidance as to the tax implications of this, especially with regards to any maintenance payments to be paid by me to my wife and children?
Firstly, I am sorry to hear of the breakdown of your marriage and hope happier times are ahead for you. This is of course a difficult and stressful time for you and your family, however, when a marriage breaks down legal and financial as well as emotional issues have to be dealt with. When you are sorting out your finances it will be important for you to be aware of the taxation implications of any agreements entered into, particularly any legal arrangements. With this in mind I will now attempt to outline the taxation implications of your separation.
The Income Tax affect of your separation will depend largely on whether yourself and your ex wife are jointly or separately assessed. If you are separately assessed then nothing changes. However if you were jointly assessed and you are the assessable spouse, then you are entitled to the married person’s tax credit and double rate bands for the full year in which you separate. You are taxed on your own income for the full year as well as your spouse’s income for the year up until the date of separation.
If jointly assessed and depending on your own individual circumstances, you may decide to be taxed either as a married couple or as single persons after the year in which you have separated. The payment of maintenance and the type of maintenance payments are important in deciding which tax arrangement will apply. Maintenance payments may be informal voluntary agreements between both parties or they may be legally enforceable, as a result of decisions taken by the court.
Voluntary maintenance payments are ignored for tax purposes. The spouse who makes the payment is not entitled to a tax deduction for it and the spouse receiving the payment is not taxed on it. Both spouses are taxed as single people on their other income. If you are paying voluntary maintenance payments to your ex wife and it is her main income, then you may claim the married person’s tax credit, rather than the single person’s credit, but you will still have the tax rate band for a single person.
The treatment of legally enforceable maintenance payments differs, however. If the maintenance payment is for the benefit of a child then it is ignored for tax purposes. The spouse who makes the payment is not entitled to a tax deduction for it and the spouse receiving the payment is not taxed on it.
A legally enforceable maintenance payment for the benefit of your separated spouse is taxable in her hands. You however will not pay tax on it and it may be deducted from your own taxable income. Both spouses in circumstances such as this are taxed as single people.
Separated spouses may choose instead to be taxed as a married couple if there are legally enforceable maintenance payments. In this case the payments are ignored for tax purposes; the spouse who makes the payment is not entitled to a tax deduction for it and the spouse receiving the payment is not taxed on it.
The way that maintenance payments are assigned either for the benefit of the spouse or children effects the way that the payment is taxed. This may make a difference to the amount of money actually received so it may be important to seek tax advice from a qualified tax consultant before maintenance payments are agreed.
It is also worth considering the division of family assets following your separation. Generally, disposals of assets between spouses who are living together are specifically exempted from Capital Gains Tax, Capital Acquisitions Tax and Stamp Duty. This treatment may differ however following your separation.