Mortgage Protection for Co–habiting Couples

Mortgage Protection for Co–habiting Couples

According to the 2016 census, there are over 152,000 cohabiting couples living in Ireland

The Civil Partnership Act in 2010 granted same-sex couples the legal status of ‘civil partnership’ meaning they now had the same property and financial entitlements as married couples.
Unfortunately the Act didn’t do much for co-habiting couples of the opposite sex, this cohort represents approx. 15% of all Irish households according to recent Census data. According to the 2016 census, there are over 152,000 cohabiting couples living in Ireland.
Even though a cohabiting couple live together, may own a property together and possibly have children together, in the eyes of Revenue they are treated as ‘strangers’ when it comes to inheritance tax.
The Civil Partnership Act defined a co-habitant as being “An adult who is in a relationship of cohabitation of 2 years or more (if children are involved) or for 5 years or more in other instances. These co-habitants can now legally claim from their deceased cohabitant’s estate.” However, unknown to many is the fact that inheritance tax still applies, in the eyes of Revenue they will be classified as “strangers” meaning they only have a Group C lifetime Inheritance threshold of €16,250.
This can result in an unexpected and unwelcome tax bill for the surviving partner, should the worst happen.
While many cohabiting couples put mortgage protection in place to ensure the mortgage is cleared upon the death of a partner, what they may not fully understand is how Revenue will treat the inheritance of the property by the surviving partner.
Who owned the property; how the mortgage protection policy was set up, including who paid the premiums, are some of the factors that can affect how much inheritance tax the surviving partner must pay.
If you are part of a cohabiting couple, there are a number of important points you need to be aware of when taking out a Life Insurance policy.
If you arrange a life insurance policy on your own life, your surviving partner may be left with an inheritance liability. If the survivor is deemed not to have paid premiums, problems arise!
Let’s look at a practical example of a cohabiting couple, John and Mary, they decide to take out life cover of €200,000 on a joint life basis to cover any losses each may experience if one of them were to die.
John is currently unemployed, so Mary is paying the total premium on the policy until John is re-employed. What would the inheritance tax situation be if Mary were to die? Unfortunately for John, as Mary has paid all the premiums, he is deemed to inherit the whole €200,000 from Mary and has to pay inheritance tax on it. Assuming he has not received any other assets under Group Threshold C previously, his tax liability is: €200,000 - €16,250 x 33% = €60,637.
If John could prove he’d paid for half of the premiums out of their joint account, this would help reduce the tax liability by half, as it’d be assumed he’s inherited half of the sum insured. €100,000 - €16,250 x 33% = €30,318. Either way, John is left with a significant bill to pay Revenue within a certain time frame.

So, what is the best solution for a co-habiting couple?
Life of Another Policy: A more appropriate structure in the above example would be for John & Mary to take out two separate life insurance policies under a ‘life of another’ arrangement. This means that each of the policies is owned separately, clearly identifiable and there should be no future Inheritance Tax liability as they each pay for their own policies. If as in our example, John is unemployed and unable to pay the premium, this can be solved by Mary using the Annual Small Gift Tax Exemption by ‘gifting’ the premiums to John. This Small Gift Tax exemption allows for €3,000 a year to pass from any one person to another, so if the premiums are below €3,000 a year, John can claim the premiums were gifts. Therefore in this new scenario where Mary was to die, John receives the proceeds of the policy he owns without any liability to inheritance tax.
Dwelling House Exemption: It may be possible to inherit the family home from your cohabiting partner without paying inheritance tax, if you qualify for what’s called the Dwelling House Exemption . According to the Finance Act 2016, you qualify for the Dwelling House Exemption and will not have to pay inheritance tax on a house if: The house was the only or main home of the person who died (this condition does not apply if you are a dependent relative). You lived in the house as your main home for the three years before the person’s death. You do not own, have an interest or a share in any other house, including one you acquired as part of the same inheritance. The house is your main home for six years after you receive the inheritance. This does not apply if you are over 65.
In conclusion, life cover for co-habiting couples is a complicated area, it can prove very costly if you have the wrong type of cover, always seek independent professional advice.

Barry Kerr BBS QFA CFP® is the Managing Director of Wealthwise Financial Planning, Hartley Business Park, Carrick on Shannon, Wealthwise Financial Ltd T/A Wealthwise Financial Planning is Regulated by the central Bank of Ireland. All details and views contained within this article are for informational purposes only and does not constitute advice. Wealthwise Financial Planning makes no representations as to the accuracy, completeness or suitability of any information and will not be liable for any errors, omissions or any losses arising from its use.

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