Recent events have again, highlighted the importance of co-habiting couples – couples living together but not married – understanding how they are treated in certain circumstances. Whether we like to consider it or not, the untimely death of one partner in a co-habiting relationship, can have huge, adverse consequences on the surviving partner. Of course, despite alarming statistics, nobody ever expects it to happen to them!
Example: Let’s take the situation where “John” & “Mary” bought a house together and have a joint mortgage. 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 €15,075. 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 €15,075, she is liable to pay tax at 33% on the balance, leaving her with a tax bill of €44,525. 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).
In many of these circumstances, the lack of planning ahead may result in having to sell the property to pay the tax bill and avoid interest or penalties. There are ways that this can be avoided by either increasing the mortgage protection policy to allow for the tax (although this may leave the surplus amount also liable for tax) or taking out “life of another” plans on each other. The reason for this is that when a life policy is paid out, whoever paid the premiums will dictate whether or not there is a liability. For example, if John & Mary have a joint life policy for €250,000 and they pay the premiums from a joint bank account to which they both contribute, in the event of John’s death, Mary will receive €250,000 but deemed to have inherited half, leaving her with a tax bill of €36,275. At least in this case, she would have the funds to pay the bill. For the cost of a takeaway each month (€250,000 dual, convertible life cover for a 20 year term for 2 non-smokers, aged 30 next birthday would currently cost only €26.77 per month) this can solve the problem. To avoid any tax bill in these circumstances, then taking out a plan on each other (so each pays the premium for the other’s cover) would mean there would be no tax liability from the payout.
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 Advisor for over 20 years (and a Gym Instructor/Nutrition Advisor 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.