The heartbreak of marital breakdown is often followed by fear concerning the financial and tax implications that follow. Despite such trepidation and possible ill will, separating couples should sort out financial issues at an early stage, says Ms Hillary Walpole, author of Tax Implications of Marital Breakdown and a tax director at PricewaterhouseCoopers (PwC).

It is important for couples to know that although divorce is not permitted for four years following a separation, adverse tax implications take effect once a spouse moves from the marital home.

Under income tax rules a married couple is entitled to a marriage allowance of £8,400 at the standard rate which is double the single person's allowance. The couple is also allowed double the home mortgage interest relief and income allowance chargeable at the 24 per cent tax rate, and it may pay income tax as a family unit.

"When a couple separates all tax privileges are removed and they must claim tax reliefs such as home interest mortgage relief and pay income tax as single persons," says Ms Walpole.

For example, a married couple named John and Mary with a combined 1999/2000 income of £35,000 (where John made £30,000 and Mary £5,000) has a tax bill of £7,924. This figure does not take into account PRSI and levies. However, when separated John would pay £9,172 and Mary £192.

Ms Walpole suggests several steps for newly-separated couples attempting to untangle their financial affairs. First, they should see an independent, professional mediator who will help them resolve their differences and bring about an amicable separation. Mediators are listed in the telephone book and a family mediation service is available in all major towns. There are both private and publicly funded mediators available.

Separating couples may take a formal or informal route to a separation agreement. Many arrangements are informal and do not involve going to court. However, they do not carry the same weight as a judicial separation.

A judicial separation is more formal, complicated, costly and requires a court appearance. However, a judge will make certain that essential considerations like pensions and life assurance are split fairly.

Any separation discussion should involve the topic of maintenance because without an agreement taxation may become problematic. "It's a hard thing to do because the individuals are at a very vulnerable stage. However, it needs to be done even if it's an informal situation," Ms Walpole said.

Maintenance is a sum of money paid for the support of the spouse, children or both. Often maintenance arrangements are unwritten agreements and therefore are not recognised for tax purposes. This has both advantages and disadvantages tax-wise. The person paying maintenance, in most cases the husband, will not get a tax deduction and the wife will not pay tax on the monies received.

In this case, the only way that the a husband can obtain tax relief for the maintenance paid to the wife is by way of the married allowance (£8,400 at the standard rate for 1999/2000), says Ms Walpole. This is granted by the Revenue Commissioners only if the maintenance paid to Mary is greater than the income earned by her. If John pays £6,000 maintenance to Mary, who makes £5,000 a year, their combined income bills will be reduced to £8,896.

A formal maintenance agreement is a legally binding written agreement or court order regarding maintenance. In the case of a couple like John and Mary, "if it's a legally enforceable agreement then the husband claims tax relief on the maintenance and the wife is taxed on this amount. She may also have a PRSI liability on maintenance payments unless she has other income and already pays employee's PRSI", says Ms Walpole.

If Mary runs her own business, she is liable for 5 per cent PRSI on both the maintenance and business income.

Mary may also be obliged to pay a 2 per cent health contribution levy on all income if it exceeds £11,250. John may receive a refund of the 2 per cent health contribution levy relating to the maintenance he has paid from income.

Some formal separation arrangements are written in such a way that a couple may be treated by Revenue as if they were still married. If a couple wants to be taxed as a married couple, both must be tax resident in the State and each must send in a "joint election" form to the Revenue. This form of tax payment is available to divorced couples only when neither party has remarried.

"Generally speaking, most people want a clean break so they don't opt for this," says Ms Walpole.

However, if using this tax option, a couple's combined tax bills do not incur tax deductions for maintenance payments, PRSI or health contribution levies. This would be beneficial to John and Mary only if Mary's income levels, not including maintenance, remain the same. If not, John's tax bill will increase.

"This solution is only good from a short-term point of view but at least if gives people time. It's good for maybe a year because it gives time for some calm and a chance to sort out their new lives."

The division of family assets usually involves a family home. Most separated people think when they sell the family home or transfer it between them there's no Capital Gains Tax. "That's wrong because you're only exempt from CGT if you've resided in the house for the entire time," says Ms Walpole.

A married couple may transfer assets between one another without incurring Capital Gain Tax (CGT) but once the couple cease living together this no longer applies. Couples with informal separation agreements who voluntarily transfer assets, such as a home, between themselves are deemed as disposing of assets at market value. This fact combined with the exponential increase in property prices over the past few years means the Capital Gains Tax incurred may be a larger sum than expected.

According to Ms Walpole, CGT is calculated by deducting the indexed cost of the house from the current market value. An allowance of £1,000 is then deducted and tax must be paid at the rate of 20 per cent.

In the case of transferring a holiday home, the CGT liability is greater because there is no tax relief for a second home.

However, if the separated couple has either a deed of separation, judicial separation court order or a divorce court order which specifies that the assets are to be transferred from one spouse to another then there is no CGT.

After four years a separated couple may divorce but, says Ms Walpole, "there's no real difference between separated and divorced individuals in terms of taxation, they are treated as two single people by Revenue".

Division of family assets including the home, pensions and life insurance are tricky matters emotionally, legally and from a tax point of view. "Unfortunately, there's nothing straightforward about marital separation," says Ms Walpole.

It is essential that couples seeking a formal or informal separation agreement make contact with independent, separate advisers to help them assess the various options.