Unmarried co-habiting couples are frequently unaware of inheritance tax implications on claims over life cover policies and the legitimate means of managing those – according to Caledonian Life.
Evidence from brokers suggests that many co-habiting couples are under the false assumption that if either were to pass away the surviving partner would be automatically entitled to the proceeds of the deceased’s life cover policy, tax-free.
The reality, according to Caledonian, is that the surviving partner may be faced with an onerous tax bill.
It suggests that on a life cover policy of €400,000, the surviving partner could be liable for an inheritance tax bill of €127.025.25, if they haven’t paid for any of the life cover premiums themselves.
”The tax position of a life cover policy in the event of death isn’t something many of us actively think about,” said Greg Dyer, head of sales and marketing at Caledonian Life.
”There are no tax liabilities resulting from inheritances between married couples, regardless of the value of the assets.
The same doesn’t apply to unmarried couples who are co-habiting. They are treated as strangers under tax law, whereby the exemption threshold is €15,075.
Inheritances over this amount are subject to tax at 33 per cent.”.
Revenue will look for evidence to determine who has been paying the premiums. If it is clear that the premiums were paid from a joint account and contributed to by both parties, then it is deemed that 50 per cent of the proceeds have been inherited, resulting in a lesser (but potentially still substantial ) tax bill.
Dyer said that there was a ”simple and legitimate” solution to the potential tax liability on life cover policy proceeds, whereby each partner pays for their counterparts’ assurance policy, from their own bank account and income.