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Cohabiting couples in Ireland are on the rise, with approximately 1 in 10 households falling into this category. Following on from our recent blog on Inheritance Tax we feel it is important to outline what happens in the event of death of one party and what tax liability falls on the surviving member. Take an example of an unmarried couple Joe and Anne who jointly purchased a home together for €400,000. They jointly paid the deposit and jointly pay their mortgage. The couple also pay a joint life mortgage protection policy. In the event of death of one party the policy will clear the outstanding balance on the mortgage.

 

Let’s consider Anne dies in the first year of living together. On Anne’s death the mortgage protection policy clears the outstanding balance on the mortgage. Joe owns 50% of the property valued at €200,000 and inherits the other 50% from Anne as the mortgage was taken out as joint tenants. As noted above, Joe and Anne were not married therefore Joe, the surviving partner, will be liable for Capital Acquisition Tax (CAT). The tax free limit (also known as the threshold) used in the transfer of property to Joe is €15,075. Joe is seen as a ‘stranger’ from the Revenue’s perspective. The €200,000 is reduced by €15,075 to leave €184,925, taxable at 33%. Joe’s CAT liability is €61,025.

 

It is important to highlight that Joe must complete the tax return and pay the tax liability before 31st October if he receives Anne’s share of the property between 1st January and 31st August. This is a very small window of time for Joe to gather this sum of money. Many people feel they have no choice only to sell the property they purchased with their loved one before the CAT deadline in order to pay their tax bill, often selling their home for less than its true value.

 

So what can be done to prevent such a tax bill?

 

Joe and Anne could have taken 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 above that based on the current tax thresholds a tax liability of €61,025 would be due in the event of either Joe or Anne’s death. Therefore Joe can insure Anne’s life for €61,025 and as long as Joe pays the premiums. Anne can take out a policy on Joe’s life for €61,025 and as long as she pays the premiums. In the event of death, the policy pays out to the surviving party. The proceeds of the policy can be used to pay the tax bill outlined above.

 

Of course there are circumstances where cohabiting individuals are not subject to CAT. You can view the list of requirements for the Family Home Relief scheme here. In order to assess if you are liable to CAT we would recommend that you consult an Independent Financial Adviser.

 

If you are cohabiting with your partner it may make sense for you to consider a Life-of-Another policy. At Metis Ireland we can help guide you through the process. If you wish to make an appointment, please feel free to contact us.

 

Niamh Breedy

Pensions & Investments Administrator

 

Metis Ireland Ltd t/a Metis Ireland is regulated by the Central Bank of Ireland. All content provided in these blog posts is intended for information purposes only and should not be interpreted as financial advice. You should always engage the services of a fully qualified independent financial adviser before entering any financial contract. Metis Ireland Ltd t/a Metis Ireland will not be held responsible for any actions taken as a result of reading these blog posts.