According to the Census carried out in 2011, 12% of families in Ireland are now made up of cohabiting couples.  This cohort of our population still faces some unique challenges when it comes to personal finance and inheritance. In this article, we’re going to identify some of the significant issues to be managed, and set out why it is so important for cohabiting couples to get expert financial advice. Not doing so could result in some very expensive tax liabilities down the road!

The Background

In 2010 the Civil Partnership and Certain Rights and Obligations of Cohabitants Act was enacted. This Act conferred rights similar to those of a married couple on registered civil partners and qualified cohabitants. The rights extended though are different for both.

Registered civil partners now have automatic rights to each other’s estates on death. This entitlement was not extended to cohabiting couples, who can apply for a provision out of the deceased’s estate but have to pay inheritance tax on it.

As a result, it is critically important that cohabiting couples get expert financial advice in order to avoid inheritance tax bills in the future.

The family home

As cohabiting couples are not treated for tax purposes in the same way as married or civil partnership couples, the death of one partner could result in a sizeable tax bill for the surviving partner. First of all, cohabiting couples should make themselves aware of the qualification conditions for Family Home Relief, which allows a complete exemption from Inheritance Tax and Capital Gains Tax if those conditions are met. This relief is available to any two individuals, which of course includes cohabiting couples. Meeting these conditions could result in a significant tax saving on the death of a partner.

Mortgage Protection

Mortgage Protection will be put in place as a condition of gaining mortgage approval. This policy repays the loan to the bank in the event of death of a borrower. Should the conditions of Family Home Relief not be met, there is a potential tax liability for the survivor on the death of their cohabiting partner as their Inheritance Tax Threshold (the amount on which you don’t pay tax) is only €16,250.

In the worst case scenario, if one partner alone bought the house and subsequently died, their surviving partner’s tax liability could be based on the full value of the house (less the threshold amount) – a very sizeable bill.

Arranging mortgage protection on a joint life basis might give rise to a potential tax liability, as could the inheritance of the property itself.  Solutions we would consider could include, 

• Increasing the amount of life cover to cover the inheritance tax liability
• Taking out a “life of another” policy
• Taking out a section 72 policy to specifically pay the tax

We suggest strongly that you seek our advice to find the very best solution for you.

Personal & Family Protection

As cohabitants have no automatic rights to their deceased’s partners assets, unless they have a will in place the proceeds of a life assurance contract could even end up in the hands of the deceased’s next of kin. This can be avoided by the policy being structured correctly. Again we will examine your specific circumstances and advise you on the optimal route to ensure that on your death, your assets end up with your intended beneficiary and in the most tax efficient way possible.  There are very important considerations around the type of policy to be used and who pays the premium, in order to ensure the most tax efficient solution.

Small gift exemption

In Ireland there is a small-gift exemption, which allows anyone to gift up to €3,000 in any tax year to anyone else with no attaching tax liability. This can be done every year and is an effective way for cohabiting couples to transfer some wealth to each other and for parents to transfer wealth to their children - €6,000 is allowed each year from 2 parents to each child. This can really add up over time!

Cohabiting couples can use this exemption very effectively where one partner is financially dependant on the other. In order to avoid a liability for inheritance tax, it is crucially important that the person who will benefit from the policy actually pays the premium from his or her own means. If they don’t have means and their partner pays the policy, they are liable for inheritance tax on the death of their partner. The small gift exemption can be used to transfer wealth to the partner without means, who can then use this to pay the premium. This will enable the policy owner to pay the premium where he/she doesn’t earn an income.

The goal of this article is to give cohabiting couples a flavour of some of the important issues they need to consider in relation to their personal finances. We will be delighted to talk you through your specific situation, and help you ensure you avoid any nasty surprises at a later stage.