Tying the knot and untangling your taxes

Understanding how Revenue treats civil status is a must for anyone planning marriage or entering into a civil partnership, writes Alan Murray

Whether you’re planning a wedding, already married, or simply exploring how life changes can impact your finances, it’s worth learning about how Revenue treats changes in civil status.

If you enter into a marriage or civil partnership, notifying Revenue is essential to ensure your records are accurate. Even certain foreign marriages and civil partnerships are recognised for tax purposes.

And here’s where it gets interesting: Married couples and civil partners can choose from different assessment options, each with distinct implications for your financial planning.

Let’s break it down.

First year of marriage

In the year you get married or enter into a civil partnership, you and your partner will continue to be taxed as single individuals.

There is a potential benefit, however: if the total tax you pay as two single people exceeds what you would have paid under joint assessment, from the date of your marriage or partnership, you may be entitled to a tax refund.

This provision ensures couples are not financially disadvantaged during the transition to their new tax status.

Subsequent years of marriage

In the subsequent years of marriage, there are three options for calculating tax for you and your spouse or civil partner:

1. Joint assessment

When you notify Revenue of your marriage or civil partnership, Revenue will automatically apply joint assessment, but you can still choose another option. Under joint assessment, you are chargeable to tax on your combined total income.

Revenue will automatically select the spouse or civil partner with the higher income to be the chargeable person for tax purposes. The person chargeable to tax continues in this role unless the couple jointly elect to nominate the other person—they must do so before 31 March in the year they want the election to apply.

Joint assessment allows you to automatically allocate—i.e. or transfer—most of your tax credits, reliefs and rate band to your spouse/civil partner, depending on whether one or both of you have an income.

2. Separate assessment

If you choose to be separately assessed, you and your spouse or civil partner are taxed as single people during the year.

You can divide equally some of the tax credits between you, and others cannot be transferred (the same as a joint assessment).

A couple under separate assessment should have the same tax liability as a jointly assessed couple.

You may each complete a single tax return, or one of you may complete a joint tax return. A joint return must include the income, credits and reliefs for both of you.

You can apply for separate assessment, but both parties need to confirm the same.

3. Separate treatment

Under separate treatment, you and your spouse or civil partner are taxed as if you were not married or in a civil partnership. Separate treatment can be referred to as ‘single assessment’.

In this scenario, you and your partner are each taxed only on your individual income and get the tax credits and standard rate band due to a single person.

Your unused tax credits, reliefs and rate bands cannot be transferred to your spouse/civil partner. This is the main difference between separate treatment and separate assessment.

This tax treatment is usually applied where only one spouse or civil partner is resident in the State and has income chargeable to tax in the State.

Separate treatment may not be the best choice for you, as it may result in you paying more tax as a couple than you would with separate or joint assessment.

Transferring assets

As a general rule, the transfer of assets between spouses are exempt from Capital Gains Tax (CGT) and Capital Acquisitions Tax (CAT).

For CGT, as long as the couple are “living together”, transfers can be exempt. However, living together can be construed broadly.

The phrase “living together” is defined for income tax purposes as a married couple or civil partners who are not legally separated or separated in such circumstances that the separation is likely to be permanent.

Unlike CGT, while you remain legally married or in a civil partnership, you will be exempt from CAT when transferring assets between each other, regardless of whether or not you live together.

Separation or dissolution

For a couple that is married or has a civil partnership, their tax status (jointly, separately or singly assessed) before the relationship ends is important.

If you were jointly assessed in the year of separation and you were the assessable spouse, you will be taxed on all of your income for the full year and your former spouse or civil partner’s income up to the date of separation.

You can still claim the personal tax credit and PAYE credits for jointly assessed persons and the relevant increased rate band if applicable.

The non-assessable spouse or civil partner will be assessed on their personal income from the date of separation to the end of the same year. They can claim the single person’s tax credit and, if they qualify, they may also be entitled to claim the Single Person Child Carer Credit.

For couples that have been separately assessed, we look to see who the assessable spouse under joint assessment would be.

Even in a year of separation, a couple under separate assessment should have the same tax payable as a couple under joint assessment, so tax bands and credits can be moved to ensure this occurs.

Couples assessed under separate treatment are treated as single prior to the relationship ending. Therefore, there is no change to their tax position other than if they qualify for the Single Person Child Carer Credit.

In the case of a separation, the credit is paid to the party with whom the child resides. If the child resides with both parties, the credit is paid to the party to whom the child benefit is paid.

Special income tax rules apply for couples who are living apart, divorced or have dissolved their civil partnership, as well as certain cohabitants who have ended their relationship and have maintenance arrangements.

When the separation of two spouses becomes permanent, spousal exemption for capital gains no longer applies to the transfer of assets and you will be liable for CGT.

However, if assets must be transferred under a court order, the deed of separation or the divorce settlement, these transactions are exempt from CGT.

Again, some exceptions apply here—e.g. trading stock or if one partner would not have been taxable on the gain (i.e. not resident). You do not have to pay CAT on court-ordered property transfers.

Death of spouse or partner

The amount of tax you pay in the year of the death of your spouse or civil partner will depend on how you were taxed before they died.

If you were jointly assessed and were the assessable spouse, you will continue to be taxed on your own income for the full year and on the deceased’s income from 1 January to the date of death.

If you were the non-assessable spouse, then you will be taxed on your own income from the date of death to 31 December and will receive the increased personal tax credit available to a widowed person or surviving civil partner.

If you were separately assessed before bereavement, tax credits and rate bands will be adjusted based on who the assessable spouse was, with the goal of ensuring fair treatment similar to joint assessment.

If you were taxed under separate treatment, this will continue after the death of your spouse, and you will receive the increased personal tax credit available to a widowed person or surviving civil partner tax credit in the year of death.

You can claim the widowed person or surviving civil partner tax credit in the years following the death of your spouse or civil partner. The tax credit and rate band amount you can claim depends on whether or not you have any qualifying children.

If you do, you may also claim the additional Widowed Parent Tax Credit for up to five years after the year of death. You may also be able to claim the Single Person Child Carer Credit.

Upon death, any assets transferred to the surviving spouse will not be subject to CGT. The surviving spouse or civil partner will also be fully exempt from CAT on any inheritance received from the deceased.

Alan Murray is Tax Partner at Forvis Mazars