To Wed or Not to Wed!!! That is the Question, but What’s the Answer?
Well, that depends on many things, not least the fact that it’s a good idea to at least be “All Loved Up” to begin with.
There are many reasons why couples decide to live together and not get married. There’s the not insignificant cost of the wedding to begin with but we are also living in a much more liberal society than previous generations. With legislative changes removing the ban on divorce here in Ireland coupled with the recognition of same sex marriages, the fact is more and more couples and family units with children are living together, but not married. There were 31,296 cohabiting couples in Ireland in 1996. That number had risen to 143,600 by 2011 (Source CSO) and is continuing to rise ever since.
The Irish legal system doesn’t recognise cohabiting couples in the same way as it does married couples or civil partners. There is no such thing as “common-law” husband and wife and cohabiting couples are treated as strangers. Although a large majority of the Irish population, 79% in fact (Source; Royal London 2016) support the changing of the tax system for cohabiting couples; this is currently the law, as it stands.
From my experience of dealing with this over the years, it’s quite obvious, people are blissfully unaware of the issue. They're certainly unaware of the tax implications should one of them die. In this case, the surviving partner is treated as a stranger for Inheritance Tax purposes.
Take for example a couple who own their property valued at €350,000 and one of them dies. The surviving partner is assumed to have owned half and inherited the other half. The other half of the value of their family home is treated as an inheritance with only the first €16,250 exempt. This is despite the fact they may have bought, lived in and shared the running costs of their home together.
In this case, that’s €175,000 less the €16,250 exemption which leaves €158,750. This amount is taxed at 33% leaving a tax liability to the surviving partner of €52,387. WOW!!!
The same situation applies to other assets and payouts from mortgage protection or other life assurance policies. Consider a couple with two kids who’ve planned prudently and planned ahead. They previously put €500,000 joint life cover in place to pay off outstanding loans and provide finance to raise their two young children and enough to send them to college. The surviving spouse will have more than enough to contend with without getting hit with an unexpected tax liability of €77,137 in this case.
The playing field is additionally lopsided in that the survivor within this cohabiting arrangement is not entitled to a widow/ers pension. From March 2017, this is €198.50 per week with additions for child dependents. (they may be entitled to other social welfare benefits).
As I see it, the answer to the original question is probably this; Co-habiting couples and particularly those with children need to speak with either one of the following, and preferably today. A Certified Financial Planner or a Parish Priest! This is one of those areas where doing nothing can cost you dearly, so a decision is required. A Financial Planner can set up or rearrange your existing insurance plans in such a way to not attract this inheritance tax liability.
Please share this information with others you know so we as Financial Planners can do something to help. That is until the lobbyists convince the decision makers that cohabiting couples deserve to be treated fairly and in the same way as married couples or civil partners.
All details and information provided within this article are for general informational purposes only and should not be used as the basis for any form of agreement or advice. It is of a generic nature and does not take into account your own particular circumstances. Lifestyle Financial Planners makes no representations as to its accuracy and will not be liable for any errors, omissions or losses arising from its use. We recommend readers seek independent tax and legal advice where necessary.