In Ireland today, more couples are opting for cohabitation, either delaying marriage or forgoing it altogether. The Law Society’s 2016 census revealed that out of 1.22 million families in Ireland, over 152,000 are cohabiting. This represents a 6% increase since 2011. Furthermore, 75,587 of these cohabiting couples have children, marking a nearly 24% rise since 2011.
However, when cohabiting partners jointly own a valuable asset, such as property, and one partner dies, the surviving partner could face significant tax implications when inheriting the asset. (See “Inheritance Tax” section below).
Defining a Cohabitant
A cohabitant is defined as two adults who have been living together in a committed relationship, sharing expenses, for two years if they have children, or five years without children. Prior to the ‘Marriage Act 2015’, non-traditional families lacked legal recognition and rights.
The ‘Civil Partnership and Certain Rights and Obligations of Cohabitants Act 2010‘ marked a significant step for cohabiting couples. This Act offers cohabitants detailed insights into entitlements, including maintenance, property, and inheritance rights. Nonetheless, cohabitants should be aware of the implications that arise upon a partner’s death, especially regarding succession and tax liabilities.
Consequences Upon a Partner’s Death
While the Succession Act of 1965 governs married couples or those in a Civil Partnership, granting the surviving partner a legal right to a share in the deceased’s estate, cohabitants without a valid will have no automatic entitlement to their partner’s assets upon their passing.
However, the ‘Redress scheme for Cohabiting Couples’ allows surviving cohabitants to apply to the court for a share of the deceased partner’s estate, which is exempt from inheritance tax.
Inheritance Tax Insights
For married or civil partners, inheriting assets from the deceased partner does not incur inheritance tax. Conversely, cohabiting couples are treated as ‘strangers’ by the Revenue for Capital Acquisition Tax (CAT) purposes. Thus, they are liable for inheritance tax.
When inheriting, partners can avail of an Inheritance Tax threshold up to €16,250. But, given the potential value of assets like property, this could lead to a substantial tax bill, as amounts exceeding this threshold are taxed at 33%.
Guarding Against Inheritance Tax
For cohabitants, acquiring additional Life insurance is a strategic way to mitigate Inheritance tax. Many cohabiting couples with Mortgage Protection might not grasp how the Revenue will handle the property inheritance for the surviving partner. Properly structuring a life insurance policy on a ‘Life of Another basis’ can alleviate unforeseen tax issues. Several conditions, such as premium payment, property ownership, and policy setup, must be met.
Roban Financial recommends a Single Life Mortgage Protection approach. Here, both partners obtain two Single Life and a Life of Another basis Insurance Policies on each other, ensuring each pays the premiums on the other’s policy for the mortgage’s duration.
Example of Mortgage Protection Cover
Consider Sarah and Alan, a cohabiting couple:
- They jointly purchase a house worth €400,000, each contributing €50,000 for the deposit.
- They secure a Dual Protection policy for €350,000 to settle the mortgage if one passes away. Both contribute to the mortgage protection premiums from a joint account.
- If Alan dies in the first year, the mortgage protection policy settles the mortgage. Sarah, already owning 50% of the property, inherits Alan’s half.
- 50% of €400,000 = €200,000.
- Sarah’s tax liability: 33% of (€200,000 – €16,250) = €60,638.
The solution? Life of Another Insurance:
- Two Single Life Policies for Income-Earning Partners
- Each partner establishes a Single Life Mortgage Protection Policy, insuring the other for the full €350,000 mortgage amount, termed a “Life of Another” policy.
- Premiums for each policy should come from individual bank accounts, not joint ones.
- In the event of Alan’s early death, the payout would go to Sarah, reducing her inheritance tax.
- Dual Life Cover Increase for Single-Income Households
- If only one partner owns the property, the approach differs.
- Using Alan as the sole property owner and payer for the mortgage and insurance, there’s a potential tax liability if he dies.
- An alternative solution for Sarah is to increase their Dual Life Mortgage protection cover to ensure sufficient funds for the inheritance tax.
Other Strategies to Minimise Inheritance Tax
- Section 72 Life Assurance Policy: A Revenue-approved policy designed for inheritance tax, especially when parents leave property to children. It operates like regular Life insurance, offering a tax-free lump sum to beneficiaries for the tax bill.
- Small Gift Exemption: Useful when one partner lacks income. Using the earlier example, if Alan couldn’t afford insurance premiums, he could receive a tax-free gift up to €3,000 annually from Sarah to cover his policy.
- Dwelling House Exemption: Allows inheritance of a house without inheritance tax under specific conditions outlined by the Finance Act of 2016.
While various strategies can help reduce potential Inheritance Tax, each cohabiting couple’s financial situation is unique. It’s crucial to consult a Qualified Financial Advisor, like those at Roban Financial, to assess your situation and provide tailored solutions, ensuring informed decisions and peace of mind.