Co-habiting couples – know your protection needs

by | Mar 13, 2020 | Life Insurance & Protection, Back to Blog

Life Assurance for Co-habiting Couples in Donegal, Ireland

Many people are cohabiting in Donegal

Are you one of them?

The trend for couples to cohabit, rather than marry, has become increasingly more common in Donegal and Ireland in general. The decision not to marry has implications on how your estate is taxed when passed to your loved ones on death.

Co Habiting Couples – Know Your Protection Needs | Advice First Financial

Civil Partners and Co-habiting Couples Acts 2010

With the implementation of the Civil Partnership and Certain Rights and Obligations of Cohabitants Act 2010 rights similar to those of a married couple have been conferred on registered civil partners and qualified cohabitants.

Though it must be mentioned that the rights extended are different for both.

The details of all the amendments are not relevant to this article but what is important to mention is that while the Act did amend the Succession Act to allow civil partners automatic rights to each other’s estates on death, this entitlement has not been granted to cohabiting couples, though you can apply for such provision out of you deceased partners estate.

Also of note is the fact that the changes to Capital Acquisitions Tax (CAT) legislation in Finance (No. 3) Act 2011 will only be of benefit to registered civil partners.

No exemptions or reliefs from CAT have been given to cohabiting couples. So, while a qualified cohabitant may apply for provision out of their deceased cohabitant’s estate, they will still have to pay inheritance tax on anything they receive as a result of that application.

Most people are aware that all benefits passing between married couples are exempt from Inheritance and Gift Tax. Previously, this relief only applied to “legal spouses”. As a result of the changes in 2011 this ‘spouse’ exemption was extended to registered civil partners.

Strangers in the Eyes of the Law

All other cohabiting couples are still treated as strangers for Inheritance and Gift Tax purposes. The stranger threshold for Inheritance Tax is currently €16,250. Inheritances over €16,250 are subject to tax at 33%

Arranging Life Cover for Co-habiting Couples in  Letterkenny, Donegal

As you can see from the above, registered civil partners are now treated in the same way as legal spouses from a succession act and an inheritance tax perspective.
As the same rights and exemptions have not been given to cohabiting couples you need to be aware of the following areas and seek advice for a trusted advisor when taking a mortgage or putting in place a life cover.

Some areas of advice.

We will look at each of these areas separately and outline the tax and legal implications and the possible solutions to some of these problems.

Family Home Relief

The Finance Act 2000 introduced a complete exemption from Inheritance and Gift Tax on the value of “a dwelling”, subject to certain conditions.
Finance Act 2016 has added further conditions which have restricted this relief and now both the person passing on the property and the person inheriting the property must meet certain conditions.
This relief is commonly referred to as “family home relief”.

For the relief to apply, the person passing on the property must be living in the “dwelling house” at the time of their death, Plus
The person who inherits the house must:

  • Have occupied the house as his/her sole or main dwelling for three years before the date of the gift or inheritance, and
  • At the date of the gift or inheritance not hold an interest in any other dwelling house.
  • Continue to occupy the house as his/her sole or main residence for 6 years after the date of the gift or inheritance.

Thus the “family home” may be exempt from Inheritance Tax if both the person passing and the person receiving the inheritance meet these conditions which effectively ensure that the property was and continues to be their family home.

In addition, at the time they receive the inheritance the beneficiary must not own any other “residential property” – even owning a share in another property means this relief will not apply.

The relief is not restricted to the parent/child relationship. It is available between any two individuals, for example, elderly brothers and sisters living together or cohabiting couples. Because of the reference to “family home” this relief is often misunderstood.
If the above conditions are not met, then there could be significant tax implications for the survivor

Note: 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.

How to Set up Your Mortgage Protection

If you are planning to buy a house together and cohabit. Your mortgage protection should be set up correctly.
Let’s take a look at an example.

John and Mary buy a house in joint names. They contribute equally to the deposit, mortgage repayments, and joint mortgage protection policy. John dies in the first year of the mortgage (House valued at €500,000). Mary inherits 50% of the property (assuming held as joint tenants). The mortgage is cleared by the Mortgage Protection Policy. Threshold for Mary is €16,250 with tax at 33% on €233,750 = €77,137

Best Options

Increase the level of coverage on the Mortgage Protection policy by €80,000. This way additional funds would be paid providing money to settle the tax bill, but the increased cover will also attract a tax bill
The possible tax then on €40,000 at 33% is €13,200.
or

Put in place the Life of another policy for €80,000. Providing funds to settle the tax bill.

If Mary had not contributed to the purchase of the house, then she would inherit 100% of the value of the house and she would be faced with a tax bill of €159,637

After three years family home relief may apply assuming all the other conditions are met.

Other Assets

With the possible exception of the family home, the total value of all assets is liable to Inheritance and Gift Tax, regardless of how long you have lived together. Where a cohabiting partner inherits other property, or a death benefit under an insurance policy, the €16,250 threshold could easily be exceeded.

Personal Protection

When you are putting in place a life assurance policy, whether or not Inheritance Tax will be paid on any payout from the contract will be decided by two things:

  • Who will receive the policy proceeds on death (the beneficiary)?
  • Who paid the premiums on the policy?

If the beneficiary did not pay the premiums, or if the beneficiary is not the legal spouse or registered civil partner of the person who paid the premiums, the policy proceeds will be liable to Inheritance Tax.

Example 1

John takes out Life Cover of €100,000 on his own life and pays the premiums by direct debit from his bank account.
John dies and based on the terms of John’s Will the €100,000 is paid to his co-habitant partner Mary. Assuming Mary inherited no other assets, the liability to tax is as follows: Mary’s taxable inheritance is €100,000. Threshold €16,250 exempt.
Balance €83,750 taxed at 33% = €27,637

Example 2

John and Mary take out “Dual Life” Cover of €100,000 John and Mary are joint owners and pay premiums out of their joint account. John dies and the €100,000 is paid to Mary because she is the surviving policy owner.
Assuming Mary inherited no other assets, and Revenue agrees that she has paid 50% of the premiums, she will be taxed on 50% of the benefit.
So, Mary’s taxable inheritance is €50,000. Threshold €16,250 exempt.
Balance €33,750 taxed at 33% = €11,137

Example 3

Mary takes out a “Life Policy” with a Life Cover of €100,000 on John’s life
i.e. Mary is the proposer and the policy owner with John as the life assured.
Mary pays the premiums by direct debit from her bank account. John dies and the €100,000 is paid to his partner Mary, as she is the legal owner of the policy. Mary has no liability to Inheritance Tax, as she is both the beneficiary and the person who paid the premiums.

Small Gifts Exemption

The examples given assume both parties can contribute to the cost of the policy.
Where one party is financially dependent on the other, then no matter how the policies are arranged, on the death of the person who paid the premiums for the policy the survivor with pay take on the full value of the life cover.
One way of avoiding the potential taxable inheritance for someone who does not have their income would be to avail of the annual Gift Tax Exemption (currently €3,000).

For this to work, it is vital that your partner first gifts you the cost of the policy, you then use it to pay the premiums on the life of another policy. A simple way of setting this up would be for your partner to set up a Direct Debit to your bank account, and then you could put in place the life of another policy and pay the premium from your bank account.

So, in Summary

When putting in place a life cover

Mortgage Protection:

When putting in place “mortgage protection” arranging the cover on a joint life-first-death basis may give rise to a potential tax liability. For a joint mortgage though your lender may insist on the cover being set up this way.
The amount of cover could be increased to cover this potential liability.
The amount of increased cover will depend on the percentage of the property inherited by the survivor and what if any, contribution they have made to the mortgage.

Family Protection

When putting in place additional “family protection” type cover arranging the cover on a single life “life of another” basis will avoid any potential liability to inheritance tax but only where the proposer pays the premium
i.e. the proposer must have independent financial means. If the policy is affected on a dual-life basis, then the cover will need to be increased to take into account the potential tax liability.

The amount of increased cover will again depend on the percentage inherited by the survivor and what, if any, contribution they have made to the policy.

If getting Married

Where you are planning to get married or register as civil partners in the near future, you may decide that it is more practical to have a jointly-owned policy in the long term. So, you may be happy to take the risk that in the (hopefully unlikely) event of death before they “tie the knot” a tax liability may arise.
If you have other substantial assets it may be more prudent for you to either effect Section 72 cover in your name and nominate each other as the beneficiary of the policy, or each of them could affect a “life of another” policy on the other to cover any potential tax liability

Advice?

When it comes to protecting the financial security of your loved ones, we recommend speaking with a Trusted Financial advisor and taking a holistic approach to financial planning.

We are happy to discuss your plans and provide advice.

Contact Advice First today at 074 910 3938.

Questions

If you have questions either on your existing arrangements or just where to start, feel give to us a call.

Please Note:

The legal and tax information included in this article is correct as of March 2023 but is subject to change. The examples included in this document are not based on any real individual circumstances and should not be constituted as advice in any particular instance.
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.

Call us today in Letterkenny: 074 910 3938

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If you have questions or need advice on Life Insurance for Cohabiting Couples Donegal, call 074 9103938 or email now.

Co-habiting Couples in Donegal FAQ’s

What is cohabiting?

Living together with someone is also sometimes called ‘cohabiting’.

A cohabiting couple is a couple that lives together in an intimate and committed relationship, who are not married to each other and not in a civil partnership. Cohabiting couples can be opposite-sex or same-sex. A cohabiting relationship can continue to be ‘intimate’ even if it is not sexual.

If you live together, you may sometimes be described as common-law husband and wife. There is no such thing as a common law husband and wife in Irish legislation. However, couples living together now have certain rights if the relationship ends (through death or separation), though this depends on how long you have lived together and if you have children together (see Redress scheme for cohabiting couples)

What rights does a cohabiting partner have?

Property Rights of Cohabiting Couples

While couples living together now have certain rights in the event of the death of either partner, or the breakup of their relationship, cohabiting couples do not have the same legal rights and obligations as married couples or civil partnerships. This has a bearing on important life events, including buying property, having children and inheritance. For example, if you are living with your partner and you die without a will, your partner has no automatic right to any share of your estate (property, money and possessions) no matter how long you have been together. Even if your partner has provided for you in their will, cohabiting partners pay Capital Acquisitions Tax (CAT) at 33% on gifts/inheritance over €16,250. However, if you receive a gift or inheritance from your spouse (your husband or your wife) or your civil partner, you are exempt from Capital Acquisitions Tax (CAT).

How should we buy a home together?

When buying a home in with your partner, you will need to decide whether to register the property with land registry as either:

  • Joint tenants, or
  • Tenants-in-common

Before you make your decision, it is important that you understand the nature of each type of ownership and title. How you will co-own the property can affect your capacity to deal with the property in the future.
Always get professional legal advice before choosing a home ownership option. Your decision may impact your property rights in the event of a breakup, or in the case of a death.

Joint tenancy

Joint tenancy is the most common type of co-ownership title. Joint tenancy means you both co-own the property in equal shares. You cannot sell or rent the property without the other person’s consent. If one cohabitant dies, the other person will automatically own all of the property.

However, if you are not married or civil partners and your partner dies, you (the surviving joint tenant of the property) may be liable for Capital Acquisition Tax as a result of becoming full owner of the property.

Your partner is effectively ‘gifting’ you their share of the property, but because you are not married (or civil partners), you may have to pay Capital Acquisition Tax which is applicable to gifts and inheritances.

You can be co-owners in a joint tenancy even if one person contributes more financially to the property than the other person.
However, if one person has paid more for the property and the house is sold at a later date, the other person may, in some circumstances, get less than 50% of the proceeds.

Similarly, if you contribute a smaller amount to the purchase price of the property, your cohabitant is effectively ‘gifting’ you a larger part of your property entitlement. In the event that your cohabitant dies, this ‘gift’ may be liable for Capital Acquisition Tax.

Tenancy in common

Tenancy in common means 2 people own the property in defined shares, for example, 50/50, 75/25, 60/40.
Each person can leave their share of the property to whoever they wish (including their partner), but they must make a will stating this fact.
If you do not make a will, your share of the property becomes part of your estate if you die. Your partner may be forced to sell the home to allow the administration of your estate.
In addition, your family (or even a separated spouse or civil partner) can claim this share. Your surviving partner does not have any automatic right to your share of the property.

As there may be tax implications for co-habiting couples buying property, you should always get professional legal advice.

How should you be selling a property?

When it comes to selling a home as a cohabiting couple obviouly your rights will depend on your actual sitution.
If your relationship breaks down, the family home will belong to the person who holds the legal title to the home. This could be one of you, or both of you.

Living in your partner’s home.
If you are cohabiting with your partner in their house, they do not need your written consent before they can sell or lease the house.

Co-Own
If you co-own the home, the property cannot be sold without both people’s written consent.

You are not married but your name is on the title deeds

If both your names are on the title deeds, you are both legal owners of the property. You jointly have to make decisions as to what will happen to the property.
If you cannot come to an agreement, you can apply to the court to have the property sold and the proceeds divided, or it may be possible to seek an order breaking up the property. This would allow each party to decide what to do with their portion.
This may be possible where there is a lot of land connected to the family home, or if there is more than one residence on the property.

Your name is not on the title deeds, but you made contributions to the purchase of the house

Whether you are married or not, if your name is not on the title deeds to the house, you may still be able to show that you have some ownership rights in relation to the house.
Your rights are based on the fact that you may have made a contribution, (either directly or indirectly), to the purchase price of the house with the intention of gaining a share in the ownership of the house.
Usually, if you can show that you made a contribution to the purchase price of the house, you will be entitled to a share in the house in some proportion to your contribution.

For example, if you paid off half of the mortgage (and the mortgage represented 90% of the purchase price), you may roughly be entitled to 45% of the ownership of the property.

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