We have decided to write about this topic after listening to a very sad radio interview recently. It was with a father of three children, who had recently been bereaved after the death of his life partner of 20 years, the mother of his children. She passed away as the result of a medical condition, that was further complicated when she contracted Covid-19.
The couple had lived together for most of those 20 years, and for all intents and purposes, they were like any traditional family unit. They just never got married. What struck a chord with us was the unfairness that was caused as a result of their cohabiting status. The deceased partner was also the breadwinner, which further exacerbated their situation.
This situation is now becoming all too common. At the last census in 2016, there were over 150,000 co-habiting couples in Ireland, a 6% increase on the previous 2011 census figure. About one in eight couples in Ireland are cohabiting without having formally exchanged their vows.
The bottom line is… if you are cohabiting, get expert financial advice. Cohabiting couples face a number of financial challenges that are unique to them, some of which can be mitigated. While the following should not be considered advice, it hopefully will give you a sense of some of the areas to be considered.
The Background
In 2010 the Civil Partnership and Certain Rights and Obligations of Cohabitants Act was enacted. This Act conferred rights similar to those of a married couple on registered civil partners and qualified cohabitants. The rights extended though are different for both.
Registered civil partners now have automatic rights to each other’s estates on death. This automatic entitlement was not extended to cohabiting couples, who instead must apply for a provision out of the deceased’s estate under a redress scheme.
As a result, cohabiting couples need to get expert financial advice and implement solutions, in order to avoid inheritance tax bills in the future.
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. First of all, 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. Meeting these conditions could result in a significant tax saving on the death of a partner, so planning is very important.
The State Widow / Widower’s Pension
The Widow’s, Widower’s or Surviving Civil Partner’s (Contributory) Pension is a weekly payment to the husband, wife or civil partner of a deceased person. This payment was formerly called the Widow’s/Widower’s (Contributory) Pension. To qualify you must, of course, be a widow, widower or surviving civil partner. This was a significant challenge to the subject of this article, as his deceased partner was the earner. He had no entitlement to a pension based on her social insurance contributions.
Mortgage Protection
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 only €16,250.
Should the conditions of Dwelling House Relief not be met, 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. Solutions to be considered include,
Increasing the amount of life cover to cover the inheritance tax liability
Taking out a “life of another” policy
Taking out a section 72 policy to specifically pay the tax
We suggest strongly that you seek advice to find the very best 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 simply end up in the hands of the deceased’s next of kin. This can be avoided by the policy being structured correctly. Again your specific circumstances need to be examined, in order to identify the optimal route so that on your death, your assets end up with your intended beneficiary and in the most tax efficient way possible. There are 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 the small-gift exemption is a really useful wealth transfer tool. It allows anyone to gift up to €3,000 in any tax year to anyone else 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 on a policy, it is crucially important that the person who will benefit from the policy actually pays the premium from his or her own means. If they don’t have means and their partner pays the policy, they are liable for inheritance tax on the death of their partner. The small gift exemption can be used to transfer wealth to the partner without means, who can then use this to pay the premium. This will enable the policy owner to pay the premium where he/she doesn’t earn an income.
We hope you now have a flavour of some of the important issues that cohabiting couples need to consider in relation to their personal finances. However this is just a snapshot of some of the issues, and certainly should not be considered as advice. We will be delighted to talk you through your specific situation, and help you ensure you avoid any nasty surprises at a later stage.