Co-habiting couples - know your protection needs
According to the Census 2016 as published by the Central Statistics Office, 12% of families in Ireland are now made up of cohabiting couples.
We’re setting out just some of the reasons why it is so important for cohabiting couples to get expert financial advice.
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. Cohabiting couples should make themselves aware of the qualification conditions for dwelling house relief, which potentially 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 may result in a significant tax saving on the death of a partner.
Mortgage Protection is put in place as a condition of gaining mortgage approval. Should the conditions of dwelling house 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 currently €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. There are alternative approaches available - we suggest strongly that you seek our advice to find the best potential 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 a policy being structured correctly. 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 an individual to gift up to a maximum of €3,000 in any tax year to another individual with no attaching tax liability. Cohabiting couples can use this exemption very effectively where one partner is financially dependent on the other. In order to avoid a liability for inheritance tax, it is important that a cohabiting person who will benefit from a policy actually pays the premium from his or her own means. The small gift exemption can be used to transfer wealth to a partner without means, who can then use this to pay the premium themselves.
We hope we have given cohabiting couples a flavour of some of the important issues they need to consider in relation to their personal finances.