Society is constantly changing and one of the more pronounced changes in recent times has been the increasing trend towards couples cohabiting and having children before marriage. Unfortunately tax legislation tends not to change as quickly as society and this can cause a significant problem which people should be aware about. Even if the information in this mail may not directly relevant to your personal situation, I am certain that you will know people to whom the information is pertinent, please feel free to pass on, you could save them a a lot of money in tax.
With the possible exception of the family home, the total value of all assets passing between two people who are not married or civil partners of each other, are liable to Inheritance and Gift Tax, regardless of how long the couple are living together. This includes the value of any life assurance benefits. So, where a boyfriend and girlfriend live together, and inherit each others property (including a proceeds that may arise under a life insurance policy), the €16,750 stranger threshold could easily be exceeded. This can mean that a significant percentage of the property inherited (up to 30%) will be required to be passed to the Revenue in tax.
This has significant implications that should be borne in mind when structuring life insurance for unmarried couples. For example, an unmarried couple, John and Mary, have a child. They act responsibly and take out a joint policy under which they have life insurance for €200,000 each, so that in the event of either or both of their deaths sufficient financial resources are in place to safeguard the child’s future. If the life insurance is not structured correctly the following can occur;
John dies, and the life insurance policy pays out the proceeds of €200,000 to the surviving policy-owner, Mary. The insurance policy was paid for by a joint account of John & Mary. The Revenue will deem the following to be the situation – Mary will be deemed to have inherited 50% of the benefit from John. She will be taxable on €100,000 of the total €200,000. Assuming Mary has unused threshold of €16,750, she will be taxable at 30% on €83,250. She will owe Revenue €24,975! If the premiums were paid fully from John’s account, Revenue could deem that €183,250 is Marys taxable inheritance, (€200,000 – €16,750) and she could end up paying over €54,975 in tax!!
There are correct ways of structuring life insurance policies for cohabiting couples which ensure that the full proceeds of the life insurance are paid to the surviving partner without any liability to tax. Even more importantly remember that cohabiting partners have no automatic rights to their deceased partners assets under the Succession Act. So if cohabiting couples have no Will in place, the proceeds of a life assurance contract could end up in the hands of the deceased’s ‘next of kin’, their parents or even their brothers and sisters, if the arrangement is not structured correctly.
Compliments of Power Lynch & AssociatesShare