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Replies to queries - Alimony acrimony

02 June 2005
Issue: 4010 / Categories:

I have a client who is a UK resident and who is going through an acrimonious divorce

I have a client who is a UK resident and who is going through an acrimonious divorce

. Maintenance payments are being negotiated which will be paid under a UK court order.
Our client's wife who was previously resident in the UK has returned to the Republic of Ireland to live and it appears that these maintenance payments are taxable there. Our client is therefore being asked to increase the maintenance payments by the tax payable which I have been advised is 20%.
Our client is unhappy with this as he is making the payments out of his taxed income with no tax relief in the UK and the payments are then subject to taxation again in the Republic with the burden of tax falling on our client via the higher maintenance payments which he is being asked to make. This does seem inequitable.
Do readers have any suggestions on how this matter can be more efficiently arranged?
Query T16,617 — Sympathetic.

Reply by 'Bogged Down'

This is indeed a difficult problem and one can sympathise with both sides of the story: the ex-husband paying maintenance out of net income and getting no tax relief and the ex-wife being taxed in Ireland on the net income as if it has been received gross. In essence, the divorced couple has fallen into the disparity between the two countries with regard to the tax treatment of maintenance payments. Had the husband been a resident of Ireland paying maintenance to his ex-wife in the UK, his position would have been happier (relatively speaking!). Since tax relief for maintenance payments was withdrawn in the UK from 6 April 2000, it has not been possible to claim relief unless the payer was born before 6 April 1935. This seems unlikely in the present case.
In Ireland, maintenance payments received are treated as chargeable under Schedule D Case IV. The querist does not say whether any children are involved, but the payment of maintenance to children is not treated as the child's income, but as that of the parent, so personal allowances may not be offset.
Under Article 21 of the Irish/UK double tax treaty, 'elimination of double taxation', the particular circumstances of the case will not enjoy any relief because any tax paid 'shall be allowed as a credit against any Irish tax computed by reference to the same profits, income or chargeable gains by reference to which the UK tax is computed'. Clearly, this is not the case here.
One solution may be for both parties to go back to the court voluntarily (as it is in both their interests) and apply for a consent order to change the original financial terms of the divorce settlement. By so doing, the ex-husband may be able to borrow sufficient funds to make a lump sum payment to the ex-wife in full or partial settlement of the divorce, similar to a clean break. The interest on the funds would necessarily be the same or near to the current maintenance payments that he is making. The ex-wife would receive a capital lump sum which would appear to have no adverse tax consequences from a capital acquisitions tax, as gifts under foreign court orders are exempt within Capital Acquisitions Tax Consolidation Act 2003, s 88. She would then be able to invest the funds in Ireland in a way that improved her tax burden.

Issue: 4010 / Categories:
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