Many couples in Ireland choose to live together and not get married for various different reasons and also because we are living in a much more liberal society than previous generations.
Cohabiting couples in Ireland have been on the rise in the last number of years with 31,296 couples in 1996 and rising to 143,600 by 2011 (Source CSO). Figures have been rising gradually year on year.
Following on from our recent blog “what unmarried couples should know when buying a home together”, we feel it is important to outline what happens in the event of a death and what tax liability falls on the surviving member. In many cases the surviving partner is treated as a stranger for Inheritance Tax purposes, even if they both paid the deposit and both paid the mortgage together.
For example: Married couples and civil partners avail of an exemption from Capital Acquisitions Tax (inheritance tax) in event of death, but unmarried couples that live together are limited to a threshold of €16,250 (currently) and inheritances in excess of this amount are subject to tax at a rate of 33%. This may result in a significant tax bill being passed to the surviving partner irrespective of the fact that they may have bought, lived in and shared the running costs of their home together.
Mike and Aoife are an unmarried couple who are living together in a house that they jointly purchased for €250,000. They both paid for the deposit on the property and they both pay for the mortgage. They also have a joint life mortgage protection policy (Life Insurance) in place to clear the mortgage debt in the event of either of their deaths. They pay the premium for this policy from a joint account in their names.
Unfortunately Mike passes away in the first year that they are living together. Upon Mikes’s death, the mortgage protection policy clears the outstanding mortgage. Aoife already owns 50% of the property, so inherits the other 50%, valued at €125,000.
Due to the fact that Mike and Aoife were not married and the threshold for property passing between them in the event of a death is €16,250. The balance of €108,750 is taxable at 33%, which results in a tax bill of €35,888 for Aoife.
Mike and Aoife could take out Life of Another policies on each other.
The purpose of this policy is to cover various expenditures should the death of the insured party occur. We know from the above that based on the current tax thresholds a tax liability of €35,888 would be due in the event of either Mike or Aoife’s death. Therefore Mike can insure Aoife’s life for €35,888 and Aoife can take out a policy on Mike’s life for €35,888 and as long as she pays the premium for Mike’s and Mike pays the premium for her life, then in the event of a death the policy pays out to the surviving party and the proceeds from this policy can be used to pay the tax bill outlined above.
There are several benefits to structuring your Life Insurance policies on a life of another basis for cohabiting couples which your Financial Advisor will be able to explain to you in depth.
It is also important to discuss your options with your Financial Advisor about the possibility that you may not inherit the other half of the home you have built with your partner at all if you are unmarried.
There is a lot to think about and this blog is intended as a summary only. Further information is available and our Financial Advisors would be delighted to have a chat with you to discuss your circumstances and individual concerns.