When I covered this topic over a year ago, the number of people that shared the link to the blog, was 20 times more than what would usually share a blog link. No surprises there with tens of thousands of people potentially affected by harsh taxation of cohabiting couples. In fact the 2016 Census shows that of the 1.22 million families in Ireland, 152,302 were comprised of cohabiting couples. This was an increase of 8,741 on the 2011 figure. What IS surprising, is that whenever we advise on financial planning with couples such as this, they are mostly unaware of the events that could potentially leave them with a substantial tax bill!
The main two areas that impact the most, are owning a property together, and having insurance policies that cover both. Supposing “John” & “Mary” buy a house together, with a mortgage in place. In the event of John’s death, the mortgage protection plan will usually clear the outstanding mortgage. With the house held in “joint tenancy” (as it usually would be with a mortgage) John’s half-ownership of the house passes to Mary. However, under Capital Acquisition Tax (CAT) rules, Mary is classed as a “stranger” and therefore, only has a tax-free threshold of €16,250. If the house is valued at the time of John’s death at €300,000, then Mary is deemed to have inherited €150,000. After her threshold of €16,250, she is liable to pay tax at 33% on the balance, leaving her with a tax bill of €44,137.50 If Mary satisfies 3 conditions, then she can be exempt from the tax. The conditions are: 1. She must have lived with John in the property for at least 3 years prior to his death. 2. She must continue to live in the property for a further 6 years. 3. She must have no other interest in any other residential property (including abroad). If not, it can often mean that selling the property is the only option to settle the tax bill.
In the other area mentioned, supposing John & Mary have a life policy that insures both of them for €250,000 in the event of death. What is important here is how the premiums are paid. If they are paid jointly, perhaps from a joint bank account, in the event of John’s death, the policy will pay Mary the sum assured of €250,000. But Revenue will deem Mary to have only paid for half of the death benefit and therefore will have inherited €125,000. Based on the same calculation as with the property, Mary will have to pay €35,887.50 of it in tax. Worse again, if John paid for the premium from his own account, Mary will be deemed to have inherited the full amount, leaving her to pay €77,137.50 in tax. (All calculations are based on the 2017 allowances and tax rates.)
The way to prevent such a tax bill is for John & Mary to take out “life of another” policies, where Mary pays the premium on the policy covering John and he does the reverse. In this case, the recipient of the pay-out is deemed to have paid for all of the benefit and therefore has no tax liability.
It’s important that people consider their own, specific circumstances, as subtle differences can mean what’s appropriate for one couple may not be for another. For free advice in this area or if you have any questions, just contact us.
Dave Kavanagh QFA has been a Financial Adviser for over 20 years (and a Gym Instructor/Nutrition Adviser before that!) He has done advice slots on on RTE 2FM and on TV3 and does the “Ask the Expert” Financial Advice section on Mumstown.ie For more information on this topic, just send an email and remember, with Financial Companion, there is no cost and no obligation to arrange a review. Contact us to find out how simple it is.