“Ireland’s 140,000 co-habiting couples should be aware of potential tax liability
when it comes to Life Cover claims.”
Most co-habiting couples are unaware of the potential tax implications for them on claims of Life Cover policies.
They can however, legitimately manage the potential tax implications on their Life cover claim, by arranging it on what is known as ‘Life of another.’
Anthony Curran Financial Consultant with Low Cost Life Cover.ie explains, “According to Census 2011 there are over 140,000 co-habiting couples in Ireland, of which approximately 60% have children. The likelihood is that although these people are not married, they will have or will want to have financial protections in place such as Life Cover, to ensure security for their family and/or partner, in the event of the premature death of either partner.”
However, anecdotal evidence suggests that many of these people may be under the false assumption that, if either of them were to pass away, their partner will automatically be entitled to the proceeds of the deceased’s Life cover policy tax free. And they then can in turn, use it for example to provide an income for their family, pay off debts or cover ongoing expenses such as education fees.. Therefore they would think, leaving their surviving partner and family in a secure financial position. The reality however, is far more complex, and the remaining partner may face a major tax bill.
For example, on a Life cover policy of €400,000 in this domestic co-habiting scenario, the surviving party could potentially be liable for an inheritance tax bill of an eye watering €127.025.25, if they have not paid for any of the Life Cover premiums themselves.
Anthony Curran say’s that this is an issue which will become increasingly prevalent in years to come because according to the CSO statistics, co-habiting couples are by far the fastest-growing type of family unit in Ireland. Figures rose from 77,600 in 2002 to 121,800 in 2006’ accounting for 11.6% of all family units, and this has since risen to 143,000 in 2011.
Anthony went on to say, “The tax position of a Life cover policy in the event of death is naturally not something many of us actively think about. For married couples this doesn’t present a problem as there are no tax liabilities resulting from inheritances between them, regardless of the value of the assets. The same unfortunately doesn’t apply to co-habiting unmarried couples.”
He stated, “As a cohabiting couple and as such, not married or a civil partner, you may be liable to Inheritance Tax.
That’s because you will be treated as ‘strangers’ under tax law, and more to the point, the tax exempt threshold is only €15,075. Inheritances over this amount are subject to tax at 33%.”
As an example, let’s say the deceased partner pays for the Life Cover of €400,000 solely themselves from their own bank account. As part of a cohabiting couple, you as the surviving partner and based on the terms of the will, received the value of the Life cover policy of €400,000. You could now be liable for Inheritance tax of a whopping €127,025.25 (€400,000 – €15,075 = €384,925 x 33% = €127,025.25.).
Even if you have equally paid for the Life cover policy between you from your joint account, as the surviving partner of a cohabiting couple, if you are paid the policy proceeds of €400,000, you could still be liable for a tax bill of over €61,000 (€400,000/2 = €200,000 – €15,075 = €184,925 x 33% = €61,025.25).
The Revenue will look for evidence to determine who has been paying the premiums. If it is clear that the premiums were paid from a joint bank account and contributed to by both parties, then it is deemed that 50% of the proceeds have been inherited. So you face a lesser, but potentially still substantial tax bill.
It may not seem fair or equitable, but it’s the law. Anthony has some good news on this potentially worrying issue for co-habiting couples. “Thankfully, there is a simple and legitimate solution to this potential tax liability on the Life cover policy proceeds, whereby each partner pays for the other partner’s Life assurance policy, from their own bank account and income. This is known as ‘life of another’ in industry parlance. In this scenario, where one partner has paid the others premiums (and vice versa) and if the other partner died, there would be no tax liability as it would be deemed that the surviving partner paid for the benefits and therefore is entitled to the proceeds.”
This is a complex area and it’s very important that co-habiting couples are aware of this potential tax liability as well as the potential solutions and should seek professional legal and taxation advice call us on 01-6853818 or log onto www.lowcostlifecover.ie
Anthony Curran is an advocate for your financial future who takes a holistic approach to your needs and goals. He will work collaboratively with you to define what success and financial independence mean to you and how best to achieve them. Anthony Curran is qualified to provide long-term support and guidance on a variety of financial challenges and will help you focus on what you can control. Defining your own financial freedom will help you be more comfortable about retirement and the possibilities of creating the life you want. Whether you are single, married, or raising a family, your approach to financial well-being now will shape your life for years to come. www.lowcostlifecover.ie