Category: Expert Tax Library

Separated Couples

July 27, 2013

When a marriage / civil partnership breaks down and couples decide to separate, the tax implications can be significant and need to be carefully considered.

The division of assets, tax treatment of maintenance payments and the claiming of tax credits all need to be examined.

Maintenance payments for the support of children are ignored for tax purposes. Payments for the support of a spouse may also be ignored for tax purposes if the couple involved agree to this. Alternatively the spouse maintenance payments can be treated as income for the recipient and as a tax deduction for the payer.

In the year of separation the spouse who has responsibility for making tax returns to the Revenue continues to be treated as a married person for the remainder of that year assuming the couples tax affairs were previously dealt with on a joint basis of assessment. The other spouse / civil partner may be treated as a single person for the remainder of the tax year. Then the couple must decide how they wish to have their tax affairs dealt with.

They may choose to continue as though they were a married couple/ civil partnership and the normal married persons tax credits and 20% tax rate band will apply. Alternatively they may decide to be taxed as two single people.

We can provide more detailed advice on this area as each individuals’ tax affairs need to be examined to see what works best for them. Please contact us if you would like further information.

Marriage/ Civil Partnership During Tax Year

July 27, 2013

When you get married during a tax year or enter into a civil partnership you may be entitled to a tax refund. This will depend on the amount of income of each of the couple and the time of year involved.

Two calculations are required. The first involves calculating your tax as though you were two single people for the whole of the tax year.

The second calculates your tax as though you were a married couple/ civil partnership for the whole of the tax year.
If the second calculation gives a lower tax bill the difference between the two claculations is called a refund. This refund is then time apportioned over the tax year. for example if you got married half way during the tax year you would be entitled to 50% of this refund. If you got married at the end of the tax year no refund would be due.

Refunds will only arise where one of the couple pays tax at the low rate (20%) and the other at the top rate (40%). If both parties pay tax at the same rate as single persons then no refund will be due.

Married Persons/ Civil Partnerships Tax Credit

July 27, 2013

This credit is available for all married couples/ civil partnerships (referred to in future collectively as qualifying couples) living together that are not continuing to pay their tax as single persons. Qualifying couples have different options as to how they should pay their tax. There are 3 different options for known as Joint Assessment, Separate Assessment and Single Assessment.

Joint Assessment
The majority of couples pay their tax on this basis. One spouse/partner is responsible for completion and submission of tax forms to the Revenue and for paying any tax owed to the Revenue. All tax credits are normally given to this spouse/partner and if the other spouse/partner is working they receive basic tax credits only against their earnings e.g. PAYE allowance for PAYE earners.

Separate Assessment
This is not to be confused with separated couples. A qualifying couple can elect to be taxed as single people during the tax year subject to re-examination after the end of the tax year to see if they would pay less tax under the Joint Assessment basis. If so they will get a refund.

This option can lead to cash flow disadvantages between spouses if there is a substantial difference in their incomes. However, provided you claim the re-examination of your joint tax position after the end of the tax year any tax overpaid during the tax year will be refunded to you.

If you wish to use this separate assessment method you have to apply for it to your tax office before the 1st of April during the relevant tax year.

Single Assessment
As the name implies this option means each spouse/partner is taxed as though they remained single. Your tax affairs are never joined together. This can result in more tax being paid than under the Joint Basis and Separate Assessment Basis.

This option is not chosen very often by qualifying couples because unlike the Separate Assessment Basis there is no option for re-examining your tax affairs on a Joint Basis after the end of the tax year.

If you wish to use this single assessment method you have to apply for it to your tax office before the end of the relevant tax year.

PRSI Refunds

April 29, 2013

 

PRSI Refunds for Years up to 2010

Employees who are not in a company scheme but make their own pension contributions directly to an insurance company may be entitled to a refund of PRSI as well as income tax relief on the pension contributions. The relief has been abolished from 2011 onwards. This PRSI refund claim is often overlooked as it must be claimed separately through the office of the Collector General in Limerick and not through your normal tax return.

A simple claim form – Application for PRSI refund in respect of Pension Contributions – must be completed and sent to the Collectors General office in Limerick. This form can be downloaded from the Revenue website.

State Pensions

April 29, 2013

Both employees and the self-employed qualify for the state pension. If you are self employed and have been paying PRSI at the S rate all your working life you will be entitled to the state pension when you reach 66. You do not have to retire to claim it.

However, self-employed individuals need to check their PRSI payment status where they incur losses as for any year that they have a loss they will not have made any PRSI payment. To ensure that they make a PRSI payment for the year an election to make voluntary PRSI payments for the year in which a loss is incurred should be made.

It is important to do this as soon as possible after the year for when a loss arose as a two year time limit may be applied. This is dealt with the relevant section in Social Welfare and is dealt with outside of the normal tax payment system.

Tax Tip

If you are married and your spouse assists in running the business then you should ensure that they receive payment for doing so, and then they will also qualify for the contributory pension at age 66. If you are a sole trader they need to be treated as a partner in the business and pay PRSI under Class S.

For sole traders entering partnership with your spouse could have other tax implications which would need to be examined. However with careful planning this should not be a major issue. In fact it will save you tax under the individualization rules. Your spouse at age 66 should have full entitlement to a contributory pension at no extra cost to you. There will be no extra PRSI cost as the same amount of income will be liable for PRSI regardless of whether you are a sole trader or a partnership. The same position can be achieved if you carry on business through a limited company. However your spouse will be treated as a normal employee for PRSI purposes. Your spouse will qualify for the contributory pension at no extra cost.

Employees

April 29, 2013

Company Pension Schemes

Company pension schemes are provided by most employers for the benefit of their employees. Where employees contribute to such schemes tax relief will be allowed through the PAYE system at source by the employer. The amount contributed by the employee is deducted from their gross pay before tax is deducted. This ensures that the employee receives their tax relief without having to claim the benefit of the relief from the tax office. Generally speaking the amount of contribution by employees will be less than the amount which could be paid by them for maximum tax relief purposes. This has given rise to employees making additional pension contributions, which are commonly referred to as AVCs.

Additional Voluntary Contributions (AVCs)

These payments are subject to the same percentage and income limits as already explained for self employed pension contributions i.e. a maximum percentage allowable based on age and an income ceiling on the amount for which tax relief can be claimed. These limits are applied after taking into account any contributions already made by the employee to a company pension scheme, any employer and employee contributions to PRSAs and any personal pension payments made by the employee for the tax year in question.

The use of AVCs is particularly important for employees coming near pension age and is a useful tool for tax planning for retirement purposes. There are different options at retirement as to how the value of your AVC fund is dealt with, which with careful planning can ensure substantial tax relief and an improved pension position at date of retirement.

At retirement the value of the AVC fund may be transferred to an approved retirement fund account, which means the funds remain under the control of the employee. Alternatively the value of the AVCs can be used to increase your general pension fund and the level of pension available at retirement.

Normally you can arrange with your employer for the payment of AVCs through your payroll system, which means you will benefit from a reduction in both Income Tax and PRSI. AVC payments may be made during the tax year for tax relief in that particular year. As with individuals who are either self-employed or in non-pensionable employment there is a backdating facility to the preceding tax year. This allows you reclaim tax paid in the previous tax year e.g. AVC payment made in tax year 2016 and tax relief claimed for the payment in tax year 2015.

Use of AVC’S When Retiring

If you are due to retire within the next few years you should examine the use of AVCs to take maximum advantage of the tax relief due. This can help increase your future pension benefits at a relatively low cost as shown in the example below;

Assumptions

Year Earnings
€
2016

80,000
2017

90,000
2018

100,000
  • Retiring on 31st December 2018 at age 65.
  • Entitled to AVC tax relief on 40% of earnings

Recommendation:
Make maximum AVC pension payments for each tax year.

Tax Relief:

Tax Year AVC Payment
€		 Tax Relief
€		  Net Cost
€
2016

32,000

12,800

19,200
2017

36,000

14,400

21,600
2018

40,000

16,000

24,000
Total

108,000

43,200

64,800

 

Result:

Estimated Value of AVC fund €110,000
At a Cost of €64,800

For an after tax cost of €64,800 the individual concerned has an AVC pension fund worth an estimated €110,000. The AVC fund would be in addition to whatever benefits the employee is entitled to under the company pension plan. However unlike the company pension scheme the employee can take direct control over the future investment of the AVC fund. In the event of the death of the employee the remaining value of the AVC fund will then pass to their family.

U.K. Properties- Tax Treatment

April 29, 2013

Many Irish investors have acquired property in the U.K. For Income Tax purposes returns have to be made to both the U.K. and Irish Revenue. If you have UK rental income liable for tax then you will pay both U.K. tax and Irish tax thereon. The Irish Revenue will allow a credit against the Irish tax liability on the U.K. rental income for the tax paid in the U.K. If the property is sold you pay Capital Gains Tax to the Irish Revenue under Irish tax rules. Capital Gains Tax may also arise in the UK and the terms of the Double Taxation Agreement between the countries should be examined – we can provide further advice here.

Dealing with the U.K. Inland Revenue

You must register with the U.K. Revenue for Income Tax purposes and obtain permission from them to allow your tenant pay rents to you without deduction of tax. If you have an agent acting on your behalf in the U.K. they will normally make all necessary arrangements with the U.K. Revenue.

The UK Revenue operates what is referred to as The Non-Resident Landlord Scheme under which clearance is issued for the payment of rents to the non resident landlord without deduction of tax by the tenant. This scheme is administered by
H M Revenue & Customs
Centre for Non Residents
Unit 364 St John’s House
Merton Road
Bootle
Merseyside
L69 9BB
United Kingdom

If you do not have a letting agent acting on your behalf in the UK who will deal with this matter you would need to contact the UK Revenue directly to obtain the required permission from them for payments of rents without deduction of tax. Otherwise your tenant is obliged to deduct tax from your rental income

Making U.K. Tax Returns

U.K. rental tax returns have to be made up to the 5th April each year. By and large the rules for the calculation of your rental profit are the same as for the Irish Revenue. However, there is a different method of claiming a tax allowance for the fit-out of the property and subsequent replacements.

There are two options available here in respect of the letting of furnished residential property. The first is the simplest one whereby you claim a deduction from your gross rents equal to 10% of your rental income instead of a claim for wear & tear on the fit out costs for the property. Under this option you can never claim a tax deduction for the cost of furnishing a property either for the initial fit out or for subsequent replacement costs.

Under the second option you can claim a tax deduction for the net cost of replacing furnishings after the initial fit out costs. There is no annual allowance granted and no claim allowed for the initial fit out costs. As and when furnishings are replaced you claim a tax deduction for the net cost of the item in full during the tax year when it is incurred. Whichever option is chosen must be applied consistently to the properties involved. You cannot switch from one to the other.

Many Irish investors purchased new apartments which would have been fully fitted out at commencement as part of the purchase package. Generally speaking the annual 10% claim is the option chosen by most investors for simplicity and ease of calculation purposes.

If you have a taxable rental profit then U.K. income tax may have to be paid thereon. Once the rental profit is calculated you are entitled to the normal UK personal tax free allowances. For most investors who purchase a property with a substantial mortgage thereon no UK tax liability will arise thereon. If UK tax is paid you will be entitled to claim a credit for the U.K. tax paid against the Irish tax due on the U.K. rental income.

The U.K. Revenue should send you a tax return form for each tax year. Two sections of the form need to be completed. These two sections of the UK tax return form can be completed without the requirement to complete the detailed tax return form. One deals with the rental income return and the other is a declaration of non-residence in the U.K. The UK Revenue may exempt you from having to complete a tax return form every year. This normally happens when it is very obvious to them that you will never owe any UK tax on your rental income. This arrangement is solely at the discretion of the UK Revenue and is subject to whatever conditions they state in their letter notifying you of the exemption.

Foreign Bank Accounts & Foreign Life Policies

April 29, 2013

Foreign Bank Accounts
If you have opened a foreign bank account during the tax return year you must provide the following information to the Revenue:

  • Name & address of deposit holder
  • Date account was opened
  • Amount of opening deposit
  • If applicable the name & address of intermediary who opened account

Foreign Life Policies
For policies issued during the tax return year you must provide the following information:

  • Name & address of person who commenced the foreign life policy
  • Terms of the policy
  • Annual premiums payable
  • Name & address of the person through whom the foreign policy was acquired

Partnerships

April 29, 2013

A partnership is a separate legal entity from a sole trader. It requires two or more individuals to carry on business together. You could have a partnership with your spouse, your children if not minors, and any unrelated parties.
Partners are taxed on their share of the profit arising to the partnership. This is calculated in the same way and subject to the same rules as for Sole Traders.
A partnership with your spouse can be useful for tax purposes for saving income tax under the individualization rules and for Capital Gains Tax purposes under the retirement relief rules.

Social Welfare Benefits

April 29, 2013

In general Social welfare  payments (Deasp)  are taxable unless they are specifically exempt from tax. These payments are not subject to PRSI or USC.

The following Social Welfare  Payments are not liable for tax:

  • Jobseekers allowance
  • Farm assist
  • Supplementary allowance
  • Disability allowance
  • Domiciliary Care Allowance
  • Child Benefit
  • The Back to Work Allowance
  • The Back to Work Enterprise Allowance
  • Back to Education allowance

The following Social Welfare Payments are liable for tax:

  • Illness benefit ( Child dependent amount is not taxable)
  • Adoptive benefit
  • Health & safety benefit
  • Job seekers benefit
  • Death Grant
  • Family Income Supplement
  • Rural Social Scheme ( RSS)
  • Community Employment Schemes (CES)
  • State Pension

The following Social Welfare Payments are taxable and you are obliged to declare same to the Revenue.

  • Carer’s allowance
  • Blind Persons Pension
  • Widow’s Pension
  • Deserted Wife’s allowance/benefit
  • Short Term Enterprise allowance

 

No tax is deducted at point of payment. This can lead to substantial tax underpayments for people. If you have other income e.g. An Occupational Pension, which uses up all of your tax credits then the State Pension is liable for tax in full. Many people are not aware of this and if it is left uncorrected for a number of years a very substantial tax liability can arise.

If you are in receipt of the Old Age Pension you are entitled to the normal PAYE tax credit. This is an important point for people who have been self-employed all their life and never in receipt of PAYE income. When you start drawing the State pension you are entitled to claim the benefit of the PAYE tax credit.

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