Modern family units are evolving and changing and are no longer the traditional unit that would’ve been more common 20 + years previously. There are some key things to consider if you are a family unit and in a relationship, but happen not to be married;
- In 1995, 8% of children were born outside of a marriage, as of 2018, it is now 33% which infers the majority as co-habiting couples in modern Irish society.
- Cohabiting couples do not get the widower/widows pension obviously, straight away there is a need to replace circa €12,000 a year net from the Social Welfare to the surviving spouse/family unity.
- In the census of 2015 we discovered there are over 140,000 co-habiting couples living in Ireland. Of those approx. 60% have children.
- 920,000 or almost 20% of the population live in rented accommodation as of 2018, with no protection provision most likely and often in a cohabiting scenario.
Typical case study;
- A co-habiting couple have a joint life insurance policy for €300,000 paid from one partner’s bank account.
- That partner dies so there is a €300k pay-out to the remaining partner as the remaining policy owner.
- As the couple were not married, the inheritance tax threshold is only €16,250 meaning the balance of €283,750 would be liable to tax at 33%. A
- bill of €93,637 lands on the remaining partner’s doorstep, often with no means to pay it.
- If the premiums were paid from a joint account they would still be liable for inheritance tax on half the proceeds of the life policy.
- If the policy was set up on a single life basis, with no will in place the proceeds would be paid to the next of kin and not go to the remaining non married spouse
Mortgage Scenarios and Mortgage Protection policy Proceeds;
When a cohabiting couple, who are not married or civil partners to each other, buy a house or apartment with a joint mortgage, the issue of mortgage protection cover will arise on death of one spouse.
These people will be treated as strangers in the eyes of the tax law, with the inheritance tax threshold currently sitting at €15,075 with 33% tax kicking in thereafter.
In the case of a jointly owned home which is protected by a joint life mortgage protection policy, on death two things will happen:
- The mortgage protection policy will pay out and clear the mortgage and
2. The survivor will inherit the full property, having previously been a joint owner.
- Noel and Sarah are cohabiting and jointly own a home valued at €350,000. They have an outstanding mortgage of €200,000 which is covered by a joint life mortgage protection policy. Both are working and contributing to the mortgage and mortgage protection payments equally.
- Noel dies and Sarah inherits the full value of the property of €350,000, as the policy clears off the mortgage.
- Revenue have recently confirmed that Sarah is deemed to inherit from Noel, 50% of the mortgage free value of the property, i.e. €175,000.
- If Sarah doesnt qualify for the CAT dwelling exemption above, Sarah would have an Inheritance Tax liability of €52,775 on Noel’s death (33% x (€175,000 – €15,075)).
Could the inheritance tax have been avoided or reduced?
A lower Inheritance Tax liability would have arisen for Sarah if they had arranged two single life, mortgage protection policies and paid each others premiums from their own funds. In this case using the recent Revenue clarification, Sarah would be deemed to have inherited 50% of the net value of the property i.e 50% x (property value – mortgage) = €75,000
The CAT liability in this circumstance would be just €19,775 (33% x (€75,000 – €15,075)) instead of €52,775.
To qualify for the “Family Home Exemption” a surviving spouse must meet the below criteria with no inheritance tax liabilities if the below 3 are met;
- have lived there for three years before the date of the inheritance/death
- at the date of the inheritance doesn’t own another property
- will live in the house for 6 years after the inheritance.
Checklist for reviewing Mortgage Protection for co-habiting couples
- How long are you living in the house?
- Do either of you own another property?
- Who will inherit the house?
If you feel you need financial advice in this space, speak to any one of our Trusted Advisor members to discuss your concerns!