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Unwed grieving partners face tax pain

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No company will offer cover if your treatment is ongoing

No company will offer cover if your treatment is ongoing

No company will offer cover if your treatment is ongoing

Losing a loved one is hard - whether you have walked down the aisle with them or not.

However, many of the more than 143,000 couples who are living together face an unforeseen headache which married couples don't have to contend with should their partner pass away - a major tax bill.

About one in five babies born in Ireland are the children of cohabiting couples. Although not married, many of those parents have or will want to have financial protection in place, such as life cover, to provide security for their family should either partner die young. Having a life cover policy will typically help to provide income for the family, pay off debts and so on, should a partner pass away.

However, many of the cohabiting couples who have taken out life insurance are under the false assumption that if either of them were to pass away, their partner would automatically be entitled to the proceeds of the other's life cover policy tax-free. The reality is far more complex.

Married couples don't have to worry about the tax position of a life cover policy as there are no tax liabilities resulting from inheritances between them. The same does not apply to couples who are living together.

You may be liable for inheritance tax if you are living with your partner but not married or in a civil partnership. The reason for this is that you will be treated as 'strangers' under tax law. More to the point, the most that you can inherit from your partner tax-free is only €15,075. You will pay 33pc tax on any balance you inherit over that limit.

So let's say you're living with your partner and he is paying for a life cover policy worth €400,000. The cost of the premiums for that policy are being covered entirely by your partner - from his own bank account. Should he pass away and you receive the proceeds of that policy (that is, €400,000), you could be liable for an inheritance tax bill of as much as €127,025.

When you receive the proceeds of a life policy after the partner you have lived with has passed away, the Revenue Commissioners will look for evidence to determine who has been paying the life insurance premiums. If it is clear that the premiums were paid from a joint bank account and contributed to by both partners, then it is deemed that 50pc of the proceeds have been inherited. So if you and your partner have equally paid for the life cover policy between you from your joint account, the tax bill on the €400,000 proceeds could come to €61,000. That's slightly less than the bill you could face had your partner covered the cost of the premiums entirely - but it's still significant.

There is, however, a simple and legitimate way to deal with the potential tax bill you could face on the proceeds of a life insurance policy should your partner pass away - if you are not married or in a civil partnership. Each partner would pay for the other partner's life assurance policy, from their own bank account and income. This is known as a 'life-of-another' policy. The advantage of this is that where one partner has paid the other's premiums (and vice versa), there would be no tax liability if the other partner died as it would be deemed that the surviving partner paid for the benefits and therefore is entitled to the proceeds.

  • Daragh Feely is broker sales manager at Caledonian Life

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