My partner and I are cohabiting, but what are the implications in terms of inheritance tax?

Q My partner and I bought a house seven years ago and while we do not intend to marry we are in a committed long term relationship. We have taken out life cover but friends frequently advise we should marry for ‘the tax breaks’ particularly as they pertain to inheritance tax. I have concerns about what would happen to either myself or my partner when either of us passes away, I understand we are not entitled to a widows/widowers pension, but what about our house? Are there tax implications we need to think about?

A The simple answer is yes.

There are more than 150,000 people in cohabitation in Ireland, according to the 2016 Census. This figure is on the rise, but the law is slower to evolve and many cohabiting couples are unaware that only married couples and registered civil partners remain exempt from paying inheritance tax.

So, if you are currently living with your partner, and are not married or in a registered civil partnership, you will likely have to pay inheritance tax, even if you jointly own a house. This differs for people who are married or have a registered civil partnership. In this case, assets “pass on death” between spouses/civil partners and are exempt from Inheritance Tax.

Unfair as it may seem, all other couples are treated as “strangers” for Inheritance Tax purposes and unromantic as it seems, if you are in a long term committed cohabitating relationship with joint ownership of a house, you just might have to bring this up.

The “stranger” threshold for Inheritance Tax is €16,250, so an inheritance greater than this is subject to tax at 33 per cent. On the death of a non-married partner, Inheritance Tax will be payable on the total value of all assets above the €16,250 threshold, which has implications for homeowners or people with Life Cover Policies. Tax rules are unconcerned with how long the couple have lived together or how dedicated to each other you are.

Sometimes Inheritance Tax is best explained by example. Let’s look at an example similar to your situation. Tom and Alan, a cohabiting unmarried couple, buy their house in joint names. Tom and Alan’s house is valued at €300,000, they contributed equally to deposit, mortgage repayment and joint mortgage protection policy. But if one of them passes away, because of their relationships status, the survivor is liable to Inheritance Tax on the value of the house. So, if Alan were to die, Tom inherits the house and while the mortgage is cleared by the mortgage protection policy and he inherits Alan’s 50 per ent of the property he is still liable to pay Inheritance Tax. Tom’s Inheritance Tax liability is on Alan’s 50 per cent of property, minus the €16,250 exemption, i.e. €150,000- €16,250 = €133,730. Tom has to pay 33 per cent tax on €133,730 = €44,137.50.

It may be possible to inherit the family home from your cohabiting partner without paying inheritance tax, however, if you qualify for the Dwelling House Exemption.

According to the Finance Act 2016, you qualify for the Dwelling House Exemption and will not have to pay inheritance tax on a house if:

– The house was the only or main home of the person who died (this condition does not apply if you are a dependent relative).

– You lived in the house as your main home for the three years before the person’s death.

– You do not own, have an interest or a share in any other house, including one you acquired as part of the same inheritance.

– The house is your main home for six years after you receive the inheritance. This does not apply if you are over 65.

If you are a cohabiting couple and the Dwelling House Exemption does not apply to you, it may still be possible to structure your protection in a way that would help to fund, reduce or even eliminate, your Inheritance Tax liability.

If you think this affects you, I would invite you to contact a financial broker to review both you and your partner’s mortgage protection arrangements to ensure that you/your partner receive the proceeds of your life assurance plan when you need it and in the most tax efficient way possible.

This article aims to give information, not advice. Always do your own research and/or seek out advice from a Financial Broker before acting on anything contained in this article as the information given is for guideline only and does not take into account your personal circumstances. This information is correct as at May 2023 but is subject to change.