How to reduce your inheritance tax bill for cohabiting couples
Are you living with your partner but not married or in a civil partnership? Did you know that you are very exposed should your partner die? A cohabiting partner is treated as a stranger when it comes to both gift tax and inheritance tax.
Let’s focus on inheritance tax here.
In the event of the death of your partner, you could end up paying a huge amount of Capital Acquisitions Tax (CAT) on anything you inherit – 33% of anything over €16,250.
Your partner’s Life Assurance policy is deemed to be part of his or her estate, so you would be liable for tax on it. One way around this is to take out a Life of Another life cover policy. That way, if one partner dies, the policy is not theirs and therefore not part of their estate, and the surviving partner won’t have to pay tax on what is paid out.
Have a look at the example below:
Diarmuid and Aoife have been living together for 7 years. Diarmuid has his own life cover policy for €200,000, which he pays from his bank account while Aoife has her own life cover policy, also for €200,000, which she pays from his bank account. We will assume that they don’t own their home and have no other assets.
If either Diarmuid or Aoife died, the tax liability for the surviving partner would be as follows:
|€200,000 life assurance pay out
|Inheritance tax (33% of €183,750)
I’m sure you’ll agree that a tax bill of €60,638 coming on the heels of the death of a partner would be a nasty surprise. Had they married, things would be very different. Under inheritance tax rules, there is no limit to how much a spouse (or registered civil partner in the same of same-sex couples) can inherit tax free.
Diarmuid and Aoife take out a Life of Another life cover policy on each other for €200,000 each. This means that the policy pays out the sum insured when the other named person dies. Diarmuid is the owner of his policy and pays the premiums from his bank account with Aoife as the life assured. Aoife is owner of her policy and pays the premiums from her bank account with Diarmuid as the life assured.
If Aoife dies, Diarmuid receives €200,000 but it is not subject to inheritance tax, because it is his policy and not part of Aoife’s estate. If Diarmuid dies, Aoife receives the pay out and doesn’t have to pay inheritance tax because it is her policy, not his.
Of course this is just an illustration and your own circumstances could mean that the solution would not work for you. For that reason it’s important that you talk to a qualified financial adviser if you have any questions on this topic. Don’t hesitate to call us with your questions.