Co-Habiting couples and Inheritance Tax Considerations

Clients are often unaware that while assets passing on death between married couples/civil partners are exempt from Inheritance tax this exemption only applies in the case of ‘Legal Spouses’ and Civil Partners.

ALL other couples are treated as strangers from an Inheritance Tax point of view. The relevant ‘Group C’ threshold is currently only €16,250 – Inheritances in excess of this are subject to
tax @ 33%

When the Civil Partnership Act was passed in 2010, it created the legal status of Civil Partnership for same-sex couples. This meant that the property and financial entitlements that previously only applied to married couples would now apply to registered civil partners.

However; the Act only applies to same-sex couples who have registered their relationship.

This has caused some confusion for co-habitants of the opposite sex, who perhaps believed that they too should enjoy these financial entitlements.

Unfortunately, this is not the case as the Act’s logic was based on the premise that opposite sex couples could already get married, whereas same-sex couples couldn’t.

The Act defined a qualified Co-Habitant as being “An adult who is in a relationship of cohabitation of 2 years or more (if dependant children are involved) or for 5 years or more in other instances” meaning that either can now legally claim from their deceased cohabitant’s estate.

However, as stated above inheritance tax will still be liable in these situations, and it will be payable at the Group C €16,250 threshold.

Avoiding these Inheritance Tax implications

There are two important points that Harvest Financial Services take into account when arranging a protection policy for non-married/cohabiting couples:

1. If they arrange a protection policy on their own lives for whatever purpose, the surviving partner may be left with an inheritance liability. If the survivor is deemed not to have paid the premiums on the policy, problems can arise.

and

• That they are still treated as strangers in the eyes of Revenue so for inheritance tax purposes, the threshold applicable is €16,250.

Therefore, care is needed as to how protection policies are set up, with the
following considerations:

1. Who is going to pay the premiums?
2. Can the small gifts exemption be used?
3. Implications of the Dwelling House Exemption.

Some Potential Solutions..

The ‘Life of Another’ Arrangement

Under a simple ‘Life of Another’ arrangement, a cohabiting couple can take out separate Life Insurance policies on each other.

This means that each of the policies is owned separately, clearly identifiable and there should be no liability to inheritance tax as they each pay for their own policies.

If required one member of the couple can avail of the Annual Small Gifts Exemption to give their partner up to €3,000 per annum to pay for one of the Life Insurance Policies.

The ‘Section 72’ solution

Alternatively, each partner could take out a separate Section 72 life insurance policy to pay off any inheritance tax liability due.

The proceeds of such policies are exempt from inheritance tax, as long as they are used to pay the inheritance tax due. This arrangement may be particularly relevant to cover any tax liability for the dwelling house in which the couple are living.

For example, if a cohabiting couple buy a house in joint names and one of them dies, the survivor may have a liability to inheritance tax on the value of the house (assuming they own the house as joint tenants). However, in this case they may be able to avail of the Dwelling House Exemption.

The Dwelling House Exemption

The Dwelling House Exemption provides a complete exemption from inheritance tax on the value of the home provided certain conditions are met, basically, that it was and continues to be the couple’s home but with neither partner having any interest in any
other property.

So, if either partner had previously owned a property before they met and continued to own it when they began co-habiting, they would not be able to avail of the relief and would have a liability to inheritance tax on the property – not an unusual situation for cohabiting couples.

Need Further Information?

As always, our advice will be specific to your personal situation. For more information on inheritance tax planning for cohabiting couple give Harvest a call on 01 2375500 or email us at justask@harvest-financial.ie.

Source – Zurich Life

Making A Will

The marketing material is not intended to provide advice and is provided for general information purposes only.

The particular tax treatment contained herein is based on Harvest Financial Services Limited’s understanding of current Revenue practice as at January 2020. Please note that the tax treatment depends on the individual circumstances of each client and may be subject to change in the future. You should take such independent tax advice as you deem appropriate.