Mortgage Protection for Cohabiting Couples

1 in 10 people are co-habiting in Ireland. Are you one of them?

Assets passing on death between married couples are exempt from Inheritance Tax. BUT this only applies in the case of “legal spouses” or “registered civil partners”. All other couples, even qualified cohabitants, are treated as strangers for Inheritance Tax purposes. 

The stranger threshold for Inheritance Tax is currently €16,250 (2018)

Inheritances in excess of €16,250 are subject to tax at 33%.

Will you have to pay inheritance tax on the death of your partner?

If you think this affects you I would invite you to contact me with a view to reviewing your family and mortgage protection arrangements to ensure that you and your family receive the proceeds of your life assurance policy when you need it most in the most tax efficient way possible.

We advise that you seek professional tax and legal advice as the information given is a guideline only and does not take into account your particular circumstances.

An area for concern among cohabiting couples is the area of property ownership, and the taxation treatment of the house they live in on the death of one cohabiting partner.

The stranger threshold for Inheritance Tax is €16,250 (currently). Inheritances in excess of this are subject to tax at 33%. So where the ownership of the house passes to a surviving partner on the death of the cohabiting partner, he or she could have a considerable tax bill.

Does the property automatically pass to the survivor in every case?

1. There are two types of joint ownership which might apply – either a joint tenancy or a tenancy in common.

If the property is owned as a joint tenancy, the presumption is that the whole property passes to the surviving owner automatically on the death of one of the owners.

If the property is owned under a tenancy in common, the law provides that each of the owners holds a separate and distinct share from the other and therefore the surviving owner does not automatically inherit the share of the other joint owner who has died. The share of the deceased, in this case, passes to the beneficiary named in the deceased’s Will, if any, or under the rules of intestacy if there is no Will.

It is important to remember that cohabitants have no automatic rights to their deceased partner’s assets under the Succession Act. So if the property is owned under a tenancy in common, and your cohabiting clients have no Will in place, their share of the property could end up in the hands of the deceased’s ‘next of kin’, their parents or brothers and sisters.

Will Inheritance Tax always apply?

The Finance Act 2000 introduced a complete exemption from Inheritance Tax on the value of “a dwelling”, provided the person inheriting the property satisfied certain conditions – basically that it was, and continues to be, their home. This is commonly referred to as “family home” relief.

The relief is available to any individual who satisfies the conditions and not just to qualified cohabitants. To qualify for the exemption the person who inherits* the home must:

•  have occupied the house as their sole or main dwelling for three years prior to the date of the inheritance,

•  not hold an interest in any other dwelling house at the date of the inheritance,

• continue to occupy the house as their sole or main residence for 6 years after the date of the inheritance.

What this means is, once a couple have been living in the house for 3 years, regardless of which of them own the house, paid the mortgage or the mortgage protection policy, there will be no Inheritance Tax liability on the value of the house if the above conditions are met.

However, if the above conditions are not met then there could be significant tax implications for the survivor. For example, what if one of the cohabiting partners owns other property which also passes to the surviving partner on their death or indeed the surviving partner already has an interest in a property of their own?

* Where the dwelling house is passed as a gift during the life of the original owner of the property there are additional conditions to be met.

So based on the above there are a number of things you need to think about.

•  How long are you living in the house?
• Is there any other property owned by either of  you?
• How is the house owned?
• Who will inherit the house?

Remember if the conditions for Family Home Relief are not met then there could be significant tax implications for the survivor.

Please Note: Every effort has been made to ensure that the information in this publication is accurate at the time of going to press. Low Cost Life Cover .ie accepts  no responsibility for any liability incurred or loss suffered as a consequence of relying on any matter published in or omitted from this publication..