Your Money: Family finances after a divorce – Independent.ie
Since divorce was legalised in 1996, the number of divorced people in that year (9,787) has grown substantially to 103,896 (2016 census), however Ireland still has the lowest rate of divorce in the EU, so the ‘floodgates’ certainly won’t be opening.
This week I’m looking at the finances of divorce. What should you know before the process begins?
Legal costs aside (and they are considerable), a two-year limit could mean couples would no longer need a two-stage Judicial Separation and Divorce procedure, both of which can be financially crippling.
Division of assets
For most people, the family home is the single biggest asset. Whether to sell up, or one party moves out, means extra expenses for both either way. It’s necessary to get the property valued (as all assets will be) before deciding how to proceed. A professional valuation will cost around €400 as valuers may be required to give evidence in court.
Many women, in particular, are so intent on securing the family home that they often overlook another key asset: their husband’s pension (or vice versa). A pension pot can be substantial and securing rights to it is done via a Pension Adjustment Order.
Getting it valued requires an actuary but it’s important as it helps to secure the future, after the children are grown up. This is especially so for stay-at-home wives who may not have access to a pension of their own.
Cost: around €1,000 for a formal actuarial review.
The first year of separation is recognised by Revenue as a transition period. Maeve Corr, head of Private Client Services at Crowe, says how you are treated for tax after separation is important.
“You can be individually or jointly assessed, depending on which is more favourable”, she advises. “For a couple on similar incomes, it doesn’t really matter, as they’re both on the same rate, but a disparity in income levels can mean that one spouse claims the credits for the couple and when they separate this can reduce as they go from a married to a single allowance.”
She adds a warning for spouses who return to work after divorce. “If you go back to work or higher earnings, maintenance payments could send you into the top tax bracket, so you need to consider that.”
But she adds that “you can apply for a single parent child care credit which can effectively bring the 20pc tax band threshold from €35,300 to €39,300”.
The tax position around payments from one spouse to another is complex.
When determining how much should be paid in maintenance, the last three years of expenses is examined.
“It’s individual to every family and we normally recommend having a few ‘goes’ at it,” says Corr.
“It’s easy to forget things like food, holidays, uniforms and can cause cash flow issues if it’s not done properly. You also have to separate out general family costs from child-specific ones, which can be tricky.”
Spousal maintenance is fully tax deductible for the person making it (including PRSI and USC), while child maintenance is not.
Spousal maintenance is tax liable for the person receiving it, child maintenance is not. That means it’s important to separate the order clearly so Revenue is satisfied.
Many women come a cropper with tax years later because they haven’t arranged their affairs properly or don’t realise that tax is due on payments. It is especially serious if they’re also claiming the one-parent tax credit.