Cohabiting couples don’t have the same rights as married couples. In today’s Ireland where lots of people want to live together but not get married, this sets them at a big disadvantage. Today, we are going to look at the case of inheritance and the family home.
In the eyes of the law, married couples can pass assets to each other without triggering any tax liability. For cohabiting couples, they may as well be strangers. They can pass the same amount of assets between each other as you can to a stranger on the street. How does this work with a property?
You and your partner buy a property for €500,000, split 50/50. Your partner dies and you inherit the property. You already own 50%, so you inherit €250,000. You are entitled to €16,250 tax free and the rest is taxed at 33%. A tax bill of €77,138.
As way of inheriting the family home without incurring an inheritance tax bill is to avail of the dwelling house exemption. You can qualify for this if you satisfy the following conditions:
The obvious problems with this is the risk you are taking with time. If you have just bought the house and your partner dies, you will not satisfy the 3 year rule. The 6 year rule is also quite a long time. If you meet someone else, you may want to move house, especially if the inherited property is small and not suitable to raise a family in over the long term.
Usually mortgage protection policies are taken out under a joint life basis. That is both parties are under the same policy and if one of your dies, the policy pays out.
For cohabiting couples, you take out separate policies, but not on your own life, you take out life cover on your partner’s life for the full value of the mortgage i.e. €450,000. If your partner dies, you own the policy, so there is no tax liability on the pay out. You then use the money from your own policy to clear the mortgage. You will in effect inherit the mortgage portion of the house from yourself and therefore no inheritance tax is due.
Inheritance tax will be due though on the mortgage free portion. If death occurs early into the mortgage, the amount still due will be small. In our example, there is €50,000 mortgage free, so €25,000 inheritance. After deducting the CAT threshold of €16,250, €8,750 is taxable, so there is a CAT bill of €2,888.
It is important to know that as you are the owner of this policy, you must pay for it from your own bank account.
A couple may simply increase the level of life cover under their policy to include the potential inheritance tax bill that they may incur. It is important to agree this with your bank first as they may have questions as to why you have a higher level of cover than required.
So you estimate the potential tax bill. In our case, it is €77,138. Now this amount is also taxed so, we want the net payment to equal €77,138. The gross amount required would be €115,131 in additional cover.
Until the laws are changed, cohabiting couples are at a real disadvantage when it comes to inheriting assets from their partner. It is important that they put provision in place to protect each other from future inheritance tax bills.
If you have any questions, send me an email at firstname.lastname@example.org