Mortgage Protection for Cohabiting Couples

The number of cohabiting couples is on the rise. According to the 2016 census there has been a 6% increase in cohabiting couples since 2011. Census data from 2016 counts 152,302 cohabiting couples in Ireland. 

What some of these cohabiting couples may not realise is that depending on how their mortgage protection was set up, they may be liable to large inheritance tax liabilities if they were to claim. 

When you are buying a house you will either have a single or a joint mortgage. If you have a joint mortgage, both of your names will be on the mortgage papers.

Inheritance Tax

Inheritance tax in Ireland currently stands at 33% on any inheritance above the threshold assigned depending on your relationship to the deceased. Unless you are married to a person, you will be liable to inheritance tax on anything above your threshold. Currently the threshold in Ireland for a cohabiting partner is €16,250. Anything inherited above this threshold will be taxed at 33%. 

When a cohabiting couple buy a house together, they may not realise that they could be liable to inheritance tax on anything they inherit from their partner, including their family home. Luckily there is a way to reduce this inheritance tax if your mortgage protection is set up correctly. 

Here is an example of how an unsuitable mortgage protection policy could cost you if you were to claim:

Jack and Emma who are cohabiting, bought a house together for €300,000. They have a mortgage of €250,000, with a joint mortgage protection policy. If Emma was to die during the term, revenue would consider Jack as inheriting 50% of the house from Emma. 

Jack's inheritance tax would be calculated as follows:

50% of the mortgage free value of the house (€300,000) = €150,000 (total inheritance)

inheritance (€150,000) - threshold (€16,250)= €133,750 (taxable inheritance)

taxable inheritance (€133,770) x 33% (inheritance tax) = €44,137.50 (inheritance tax owed by Jack)

How Can Cohabiting Couples Reduce their Inheritance Tax liabilities?

You have options available to you, and depending on your financial circumstances, we can advise you on what option would be best for you. 

Option 1.

Using the above example of Jack & Emma, if they were to set up their policy as 2 single life of another policies rather than one joint policy, they could reduce their inheritance tax liability. Life of another policies are set up where you insure your partner, and they insure you. You pay the premium to insure your partner from your funds and they pay the premium from their funds to insure you. It is really important that the premium does not come from a joint account, and that it is collected from the policy owners account rather than the life assured's.

In Jack and Emma's case, the inheritance tax liability would be lower if they did this. Jack would be considered to inherit the net value of the house not including the mortgaged part of the house. Since he has insured Emma, he is not liable to inheritance tax on the mortgaged part of the house. See the calculations below:

Value of the house (€300,000) - mortgage covered by life of another policy (€250,000) = €50,000 (total inheritance)

Inheritance (€50,000) - threshold (€16,250) = €33,750 (taxable inheritance)

Taxable Inheritance (€33,750) x 33% = €11,137.50 (inheritance tax owed by Jack)

Although this has reduced the Inheritance tax from €44,137.50 to €11,137.50, this may still be hard for Jack to pay. There are more options for Jack which could reduce this even further. It is also important to note that as the mortgage decreases, the net value of the house will increase, which would result in the inheritance tax payable increasing. 

There are a few ways around this, for example choosing a level term life of another policy rather than a decreasing one. This means that even though the amount owed on the mortgage decreases, the original amount of cover will remain intact. In Jack and Emma's case, if they owed €100,000 on their mortgage, but their mortgage protection was a level term life of another policy, they would still be covered for €250,000 inheritance tax free. This should cover any increase in inheritance tax owed. 

They could also increase the original sum by the original inheritance tax liability. In this case rather than applying for cover worth €250,000 (mortgage owed), they could apply for cover of €251,137.50 (mortgage owed + inheritance tax liability).

Option 2.

Jack and Emma could keep their joint policy from the first example. To eliminate having to pay any inheritance tax on the death of either of them, they could set up 2 additional life of another policies to cover the inheritance tax. 

Since they would be liable to inheritance tax of €44,137.50, they could take out a life of another policy for that value which would cover the inheritance tax liability entirely. 

If later on in their lives Jack and Emma choose to get married or enter into a civil partnership, they would no longer need this extra life insurance policy, as there is no inheritance tax liability on married couples, and they could cancel it. 

This could be a good option for cohabiting couples who plan on getting married or enter into a civil partnership later on in life. 

Dwelling House Exemption

The Dwelling House Exemption was introduced in the Finance Act 2016.

It applies to inheritances on or after 25th December 2016.

 

You’ll be exempt from paying Inheritance Tax on a house if:

  • The house was the only/main home of the person who died

  • You lived in the house for three years before your partner died

  • You don’t own any other house 

  • You live in the house for six years after your partner dies.

The Redress Scheme

The redress scheme can provide some protection but there are different rules with eligibility.

 

It covers things such as maintenance orders, property adjustment orders, and pension adjustment orders.

 

You can learn more about it by clicking on Citizens Information.

Section 72 Life Insurance Policy

Section 72 Insurance is a special type of Life Insurance that’s designed to cover Inheritance Tax.

 

It can be commonly used by parents who have large estates and want to cover the inheritance tax liability for their children. It can also be used to cover your estate if your cohabiting partner is inheriting from you.

 

If you want to find out more about Section 72 Insurance policies just click here.

Get in Touch to find out more!

Call the office on 0404 67123 to find out more, or click here to fill out our contact form and a member of staff will get in touch with you!

Inverdea Financial Services Ltd.


Tel:  +353 (0)404 67123

 

Email: info@inverdea.ie


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Inverdea Financial Services,

Inverdea House,

2 Bridge Street,

Wicklow Town,

Co. Wicklow, Ireland

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