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Tax Implications for the Family Home on Separation or Divorce

The tax implications for a married couple who separate or divorce can be important factors in deciding what is to be done with the family home.

It is advisable to seek professional tax advice from the beginning, as taxation implications vary depending on the type of tax and a mistake in calculating tax liability could have disastrous financial results. However, as a guideline there are some general tax provisions to note when a married couple separates or divorces and the family home is involved.

Stamp Duty

Stamp duty is the government tax payable on a specified group of legal documents, many of which are used in property transactions. With regard to the family home, stamp duty is payable on the document which transfers the family home or a share in the family home to another party. The rate payable is based on whether or not the transferee is a first time buyer of property (either in Ireland or abroad) and if the person intends on living in the property as their principle primary place of residence.

Married persons enjoy an exemption from stamp duty on transfers between each other. This applies even if a couple are separated as they are still legally married. However, upon divorce a couple loses their exemption from stamp duty on a transfer between the former spouses. As a transfer between spouses takes place by use of legal documents that attract stamp duty, this tax could become payable on the transfer. However, if upon or after divorce a formal separation agreement or court order exists directing the transfer of the family home to one of the former spouses, then the full stamp duty exemption will remain in place and no stamp duty will be payable on a transfer between the parties.

There is another aspect of stamp duty which is also relevant to couples who separate or divorce and are joint owners of the family home. This is the stamp duty status of each of the former spouses once they have separated and divorced, as they are no longer 'first time buyers'. After the 15th of June 2000 it is possible for one member of the former couple to retain their stamp duty status as if they were a first time buyer if:

• They are no longer living in the family home
• Their former spouse remains living in the family home
• They no longer retain any interest (real or beneficial) in the family home

This is a very important consideration to take into account when deciding what to do with the family home. If one party wants to remain in the home, it may be a tax planning option for the person who leaves the family home to give up his or her interest, buy either being 'bought out' of their share or possibly giving up equity as a maintenance provision . If this is done, the person who left the family home will be exempted from stamp duty as if a first time buyer on their next purchase of a property which will be their principle private dwelling. However, if the family home is sold and neither party remains living in this property, then both parties lose their stamp duty exemption and must pay stamp duty on a future purchase at the then current applicable rate. Please note that if after a separation a person's stamp duty exemption as a first time buyer is lost, then they might qualify for an Owner Occupier exemption (please see www.revenue.ie for further details in relation to this exemption).

It is very important to be aware that contrary to what one might expect, if a person who is no longer considered a first time buyer by the Revenue Commissioners purchases another property jointly with someone in the future, for example a new partner, even though the new partner might be a first time buyer, the full rate of stamp duty will apply to this new purchase. It is not that case that if one of the purchasers is a first time buyer and the other is not that only half the stamp duty rate is payable and this could be a shock to someone who has not sought professional tax advice.

Capital Acquisitions Tax

Capital Acquisitions Tax (CAT) is the tax paid on a gift for which no consideration (i.e. no monies) are paid. The current rate is 20% which must be paid on the amount of the gift after a tax-free threshold is exceeded. CAT can arise where the joint owner of a property transfers their half to the other joint owner for no consideration. This is because one person is receiving the gift of one half of the property. CAT is not payable on transfers between separated persons as they are technically still married, but upon divorce this exemption ceases. However, if a transfer has been directed by a court order or in a separation agreement, then an exemption from the payment of CAT will still exist.

Capital Gains Tax

Capital Gains Tax (CGT) arises on the gain a person makes from the disposal of an asset, which includes property. The principle primary residence of a person is exempt from CGT providing that certain conditions are met. Transfers of the family home between spouses who are living together are usually exempt from CGT. However, contrary to the provisions regarding stamp duty and CAT, CGT law mandates that to enjoy an exemption from CGT on a transfer between spouses, the couples must be married and must be living together. In the case of a de facto separation, which means they are not 'living together as husband and wife' but there is no formal legal separation in place, then CGT might become payable on a transfer between the spouses, except in the year of separation.

If a married couple has separated, transfer of the family home between the spouses can be done without CGT liability in the year of separation. After the year of separation, in order to avoid CGT liability, the family home must be transferred between the spouses on foot of an order of the court or separation agreement. It is extremely important to obtain professional tax advice before transferring the family home between spouses after a separation (either formal or informal) or upon divorce. If the family home is transferred to the other spouse after the year of separation and there is no formal court order or separation agreement directing same, then the spouse who transfers his or her interest in the property to the other spouse could be liable for full payment of CGT on the gain, the current rate of tax being 20%.

Seeking Family Law Advice

For further information, please contact Malcomson Law by calling 01 8744422 or by filling out an Online Enquiry Form. Your enquiry will be forwarded to a solicitor who specialises in Family Law.

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