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Monday 16 September 2019

Inheritance tax leaves cohabiting couples facing an uncertain future

Unmarried and children face inheritance nightmare which could cost hundreds of thousands of euro and force sale of family home, writes Louise McBride

You could find yourself in a situation where you have to sell the family home to settle the inheritance tax bill.
You could find yourself in a situation where you have to sell the family home to settle the inheritance tax bill.

Couples who are living together - and people caught up in the housing crisis - are facing major inheritance tax headaches and bills. These bills, which could easily run into the tens of thousands - and in some cases, hundreds of thousands - could ultimately force the sale of the family home and other treasured possessions.

LIVING TOGETHER

Many cohabiting couples could find themselves in a very difficult position when it comes to inheritance tax. Should you and your partner have never married, you could face a substantial inheritance tax bill when your partner passes away - even if you have lived together for many years and have had children together. You could even face a major inheritance tax bill when the family home passes to you, particularly if you and your partner did not buy that home jointly.

Married couples and civil partners have a big tax advantage over unmarried couples: a spouse or civil partner does not have to pay inheritance tax on anything left by the deceased partner to him or her (though a divorced or separated spouse may have to). The surviving partner in a cohabiting couple, however, does not enjoy the same automatic exemption from inheritance tax as spouses and civil partners do.

"Partners in cohabiting couples are effectively strangers for the purpose of inheritance tax as they are not blood relatives and they are not married," said Oonagh Casey Grehan, partner with Fagan & Partners. This means that, typically, the most that a partner in a cohabiting relationship can inherit from the other tax-free is €16,250, according to Casey Grehan.

So, if you have lived for many years in a property which was owned by your partner, and that property has become the family home, you could have to pay inheritance tax at a rate of 33pc on most of the value of that property (bar the first €16,250 of it) if it is left to you. So you could find yourself in a situation where you have to sell the family home to settle the inheritance tax bill.

You may be able to inherit the home tax-free if you qualify for a tax break known as the dwelling house exemption. However, there are strict conditions around this tax break and just because you have lived in the home for many years doesn't mean you automatically qualify for it.

For example, should you own or have a share in another dwelling property, you won't qualify for the dwelling house exemption. This applies whether the other property is located in Ireland or abroad. Even a part share in another dwelling property, however small the share, would make you ineligible for the exemption. This could catch many unmarried couples out: with relationships often forming later on in life, people sometimes hold onto properties they had bought before they met, and moved in with, their partner.

"Many people think that cohabiting couples have the same rights as married people," said Michael Gaffney, a tax expert with KPMG. "In the area of inheritance tax, this is generally not true. There are limited cases where a cohabiting partner might be treated similar to a spouse. This can occur where a court order has been made awarding them money or assets. Otherwise, to get the tax exemption for gifts or inheritance between spouses they must be married."

There is a redress scheme in place for cohabiting couples which can provide protection for a financially-dependent member of the couple if the relationship is long-term and ends either through death or separation - but only if the individual is eligible for redress under the scheme.

Where a court order is made to transfer property to a cohabiting partner under that scheme, there should be no Capital Gains Tax, gift or inheritance tax liability for either partner as a result of the transfer (though some CGT may be payable if the property is sold at a later date).

Cohabiting couples who have children should note that a child can inherit up to €320,000 tax-free from his or her parents.

No matter how strong your views are against marriage, when it comes to inheritance, you could make your - or your partner's - life much easier by getting married or entering a civil partnership.

"Marriage is the best option from an inheritance tax perspective - if it's an option," said Casey Grehan. "Failing that, the couple could take out a life assurance policy." Such life assurance policies, known as Section 72 plans, are designed to help people pay future inheritance tax bills.

Couples who have got married or divorced abroad should check what their inheritance rights are - and where they stand on inheritance tax. "As people travel a lot more now, you can have spouses who have been married, or divorced, under the laws of other countries," said Gaffney. "Occasionally this can lead to unpleasant surprises if it turns out that a marriage is not recognised under Irish law either because there is insufficient official evidence, or because some foreign divorce is not recognised in Ireland - thereby casting doubt on whether a subsequent marriage can be recognised."

If your marriage is not recognised in Ireland, you can expect to be treated as strangers for the purposes of inheritance tax, and could face a large tax bill as a result, according to Casey Grehan.

PROPERTY LADDER

The housing crisis has forced many adult children to move back home with their parents - if indeed they had been in a position to move out in the first place. Where the prospects of a child ever buying their own home are slim, the parents may consider leaving the family home or other property to that child.

One of the biggest dilemmas facing parents today is whether or not they should pass on such property as gifts to the next generation while they are still alive - or if they should wait until they have died before the inheritance is passed on.

For tax reasons, it is often wiser to wait until you have died to pass on property. This is particularly true of the family home.

Let's say, for example, that you have an adult child who recently moved back into the family home. Under the tax-free thresholds for Capital Acquisitions Tax (also known as gift and inheritance tax), a child can get gifts or inheritances of up to €320,000 tax-free from his parents over his lifetime.

"This tax-free threshold figure has not kept pace with house price inflation, particularly in cities, so it is possible that even for a modest house there could be substantial inheritance tax bill when the family home is passed on to children," said Gaffney.

When a child inherits a property worth more than €320,000 from his parents, the excess over €320,000 is taxed at 33pc.

The dwelling house exemption could make it easier for you to pass the family home onto your child tax-free. Be sure to check, and meet, the conditions of this tax break though: the rules around the dwelling house exemption were tightened up in recent years so it has become harder for children to use it to inherit homes tax-free. For example, to inherit the home tax-free under that exemption, your child must have lived continuously in your home for at least three years before your death - and your home must have been your child's main or only residence during that time.

Furthermore, the exemption can only be claimed for a property which was the principal private residence of the donor at the time of the donor's death. So in most cases, the dwelling house exemption can now only be used for inheritances.

The only way that this exemption can be used to pass on the family home tax-free to a child while the parents are still alive is where the child is a dependent relative (due to a physical or mental infirmity).

"Another problem with the transferring of the family home by the parents while they are still alive is that they [the parents] could be subject to CGT if the property has gone up in value since they bought it," said Gaffney. "CGT applies at a rate of 33pc of the increase in value. However, CGT does not apply if the house passes on death - that is, by way of inheritance."

Most of us don't like to think about death - or the consequences of it. However, addressing death - and doing what you can to limit, or prepare for, the taxes it can trigger - can make a big difference to those who survive you.

 

Dealing with inheritance tax bills

GET THE RIGHT LIFE COVER

Should you be buying a Section 72 life assurance policy to cover future inheritance tax bills, do the maths beforehand, advises Nick McGowan, director with the life insurance broker Lion.ie.

“Total up the value of all the assets that will form part of your estate — including property, investments, cash and anything of value,” said McGowan.

“Let’s say, this comes to €1.2m and you have three children who will receive an equal share of €400,000. Their tax-free threshold is €320,000 each, leaving a taxable inheritance of €80,000 per child. This is taxed at 33pc, giving each child an inheritance tax liability of €26,400, or a total liability of €79,200 for all three.

“You could therefore take out a Section 72 plan for €79,200. The proceeds would be used to pay their inheritance tax liability so your

children get the full value of their inheritance.”

McGowan advised married couples to arrange Section 72 policies on a joint life, second death basis. “By doing this, on the first parent’s death, the assets will pass to the surviving spouse tax-free,” said McGowan. “On the second parent’s death, the Section 72 policy will pay out to cover the kids’ inheritance tax liability.”

The cost of a Section 72 policy will depend on age, health, the size of the inheritance tax liability you wish to provide for, and whether or not you are a smoker. You could, for example, pay €134 a month for a policy which covers an inheritance tax bill of €100,000 — if you’re a 50-year-old non-smoker when you first buy the policy.

Be sure to meet the tax rules around any Section 72 plan you buy. “The plan must be set up for the purpose of paying a future inheritance tax bill from inception as there are specific rules about what policies can be used for these purposes,” said a spokesman for AIB. “There are a number of Revenue rules around these policies.”

GET A LOAN

Should you be a facing a crippling inheritance tax bill, you may be able to take out a loan to cover the bill. This could be useful if you would like to hold onto a property you inherited, rather than sell it to settle the tax bill it triggered.

Most banks — including AIB, Bank of Ireland and KBC — offer loans to cover inheritance tax bills (as long as you can afford the repayments). The size of the loan, as well as the lender, will typically determine whether you can take it out as a personal loan or as a mortgage.

DRAW UP A WILL IF LIVING TOGETHER

As well as understanding and preparing for the inheritance tax bills which might arise for either partner, cohabiting couples should get up to speed on their inheritance entitlements.

“It is very important for cohabiting couples to draw up a will,” said Oonagh Casey Grehan of Fagan & Partners. Otherwise, if you die without making a will, your partner is likely to have no right to any share of your estate, apart from what was held jointly — no matter how long you have been living together.

By contrast, in a marriage or civil partnership, the surviving spouse or civil partner has a legal right to a share of a spouse’s estate when he or she dies, regardless of what was outlined in the deceased’s will.

Unmarried couples should also get advice around the redress scheme for cohabiting couples as

not everyone qualifies for redress under this scheme.

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