More and more Irish people are not getting married. There could be a of variety reasons which include; wanting success in a career before settling down, they haven’t found the one, they don’t believe in the tradition of marriage, fear of a costly divorce, or the cost of having an expensive wedding. Many believe they can raise a family without getting married. There is also a lot less stigma in having children out of wedlock. Not getting married is a very personal decision and does not carry the same judgement nowadays that it did in the past. But does it make financial sense to not get married?
When it comes to death, married couples are better off than their co-habiting counterparts. For married couples no inheritance tax is due if one partner dies, the other partner receives all assets tax free from their deceased spouse. Unfortunately for co-habiting couples the same rules do not apply. Co-habiting couples are classed as strangers from an inheritance perspective. Co-habiting couples are strangers in the eyes of the law from a capital acquisitions perspective and are categorized under the Group C threshold and are considered strangers. The maximum tax-free amount that can be passed between strangers is €16,250 (2018). Any amount over this is taxed at 33%. (2018 Rate)
If it is your decision to not get married and raise a family, it is really important to understand the tax and inheritance consequences. Understanding the legal and tax position means you can plan to ensure your loved ones are protected and provided for adequately, and in the event of death, any tax due is minimised.
Your own home is probably one of the most important assets in your family.Thankfully for co-habiting couples, when a couple purchases a family home and if they purchase the home as joint tenants, and they fulfil the dwelling home exemption rules they may not have to pay inheritance tax if a partner dies.
To qualify for this exemption, you will need to adhere to the revenue guidelines below.
- The house was the only or main home of the person who died.
- You lived in the house as your main home for the three years before the person’s death.
- You do not own, have an interest or a share in any other house, including one you acquired as part of the same inheritance.
- The house is your main home for six years after you receive the inheritance. This does not apply if you are over 65.
(source: Finance Act 2016 www.revenue.ie)
Family Life Cover Protection
It is important to protect you family financially with life cover in the event of either partner dying. It doesn’t matter whether you’re married or not, your family does need life cover to provide a financial cushion in the event of an untimely death.
Bearing in mind un-married couples are considered strangers from an inheritance tax perspective, it is important to understand how not to set-up your Life Cover to avoid paying inheritance tax.
Most couples believe by setting up joint life cover as an un-married couple, they are securing their family’s financial position in the unlikely event that one of the parent’s die. If this is the situation you are leaving your family with a significant inheritance bill without knowing it.
As an example, let’s say Chris and Amy set up a Dual Life Policy insuring each other’s life for €300,000. They both pay for the policy out of a joint bank account.
In the event of Amy’s death, €300,000 would be paid to Amy’s estate (subject to a will being set-up). This would be paid to Chris. However, since they are not married, Chris is subject to Group C rules for inheritance tax.
For Life Insurance policies if you pay for the policy, you own the policy and no tax is due. As Chris paid 50% of the premium, the first €150,000 is tax free. The remaining €150,000 will be subject to Capital Acquisitions tax.
Inheritance Tax Calculation
- For Chris €150,000 is Subject to Capital Acquisitions Tax, less €16,250 (Group Threshold). Insurance pay-out is €89,612 with a tax bill of €44,137. Total pay-out is €239,612 (Life Policy was €300,000)
In summary Amy’s life was insured for €300,000, however after inheritance tax is paid Chris will only receive €239,612.
The unwanted tax bill can be avoided. There is a way of setting up your life insurance in a way that no inheritance tax is due, as an un-married couple. By setting up two individual life insurance policies, inheritance tax due can be avoided. Each person simply takes out life insurance on the other, which is known as ‘life of another”. Each person pays the premium through their own bank account. As each person is paying for the policy, they own the policy, and therefore no inheritance tax is due.
On another note, un-married couples really do need to set up a will, to ensure their assets transfer across appropriately in the event of death. The importance of setting up a will for un-married couples cannot be underestimated. Please contact your solicitor if you are concerned.
It is vital to make sure your life insurance policies are set up correctly if you’re unmarried. If you’re an unmarried couple and want to discuss your life cover requirements, please contact me firstname.lastname@example.org. Please note this article does not constitute financial advice and these are the view of Eoin Wilson and do not represent the view of Pure Finance Ltd.
Pure Finance Ltd is regulated by the Central Bank of Ireland