By Dave Kavanagh
Of all the topics I cover, the taxation of cohabiting couples in certain circumstances, is defi-nitely the one that both baffles and angers most people. With over 152,000 cohabiting cou-ples in Ireland, this is hardly surprising. 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! While the budget slightly increased the tax-free threshold for children, the other two bands and the rate of tax are unchanged.
The main two areas that impact the most, are owning a property together, and having insur-ance 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, which covers gift and inheritance tax, 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).
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.
There are ways to prevent such tax liabilities, depending on your circumstances. If you feel you could be affected by the above and want to find out what steps you can take to avoid them, contact us, free of charge and without obligation, to discuss.
Dave Kavanagh QFA has been advising people financially for over 25 years. For quotes or information (with no cost or obligation) he can be contacted by emailing firstname.lastname@example.org or use the contact form on www.financialcompanion.ie or phone 087-6414570. Combined with his previous role of gym/nutrition adviser, he regularly gives talks and workshops at seminars and events for groups, companies and government departments on financial wellbeing, positivity and motivation. As heard on RTE 2FM and TV3.