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Mortgage Protection Cohabiting Couples

August 21 2019 4 min read Mortgage Protection

how cohabitors can reduce inheritance tax

Cohabiting couple.

It’s surely the unsexiest way of referring to living with your other half. Second possibly only to ‘living in sin’ – but even that has a certain ring to it, doesn’t it?

Of course, we’ve come an awful long way since the idea of ‘living in sin’ was enough to have most mammies disowning their children – and more and more couples are turning away from the traditions of yesteryear anyway. Given how expensive mortgages and weddings are, lots of people are choosing one or the other – or neither, in some cases.

In fact, the number of cohabiting couples (oof, there it is again) is actually on the rise. Census data from 2016 counts 152,302 cohabiting couples in Ireland, up 6 per cent on 2011.

And sure, you might be perfectly happy in your unwedded bliss – but you do need to consider certain ramifications when it comes to tax.

Tax, tax, tax… it’s no cakewalk

I’m not saying you should get married because you’d have to pay less tax, but I’m also not not saying you should get married because you’d have to pay less tax.

 

Try it out on any tax calculator and you’ll see what I mean.

Let’s consider Tony. Tony is 37 and living in sin with his other half, Carmela. Sam earns €50,000 a year. As a single person, Tony is looking at net earnings of €3,066 a month.

If Tony were married, it rises to €3,353.

Yeah.

It’s a considerable chunk of change. It’s also a wildly unromantic reason to get married, but the world needs pragmatists too.

Of course, it also kicks in around mortgages and buying a house.

Now, if you’re buying a house as a cohabiting couple, you’ve two options: a single or joint mortgage. All being fair, you’ll likely go with a joint mortgage, so both of your names are on the papers. Plus, with a joint mortgage, your earnings are added together and it’s easier to prove repayment potential.

Part of the process of buying a house in Ireland is buying Mortgage Protection. It’s fairly straightforward: it’s a type of insurance you pay so that if you (or your other half) passes away, your mortgage will be cleared.

Cohabiting or otherwise, you’ll have to get it. At least if you’re both on the books, you can halve the cost.

I will say this: don’t let your bank bamboozle you into getting Mortgage Protection with your mortgage.

The banks are tied to one insurer – but to get the best price, you should be looking at policies from ALL the insurers. Of course, you can also ask a friendly neighbourhood broker to do it for you. Much less of a headache – and less pocket ache as they can get you a better deal.

The tricky subject of inheritance

The Mortgage Protection bit is fairly straightforward, but there’s a potential sting in the tail called Inheritance Tax, which could be a reality for many couples.

I know it’s a bit grim to skip straight to one of you dying, but it’s always a consideration: if you or your other half passes away, anything left behind if you’re unmarried is subject to Inheritance Tax.

Ouch.

Generally, the most you can inherit tax-free from your partner is €16,250 – so if you’re left a house, expect to be hit with a whopper tax bill at a rate of 33 per cent. According to EBS, the average mortgage for a first-time buyer in Ireland is €225,000 – and a third of that is €75,000. That’s just not possible for most people. You’d likely have to sell up to foot the bill.

Let’s say Tony, who we mentioned earlier, gets a mortgage of €200,000 with his other half on a house worth €350,000. Sadly, she dies, in mysterious circumstances, a couple of years in. The Mortgage Protection would kick in and pay off the rest of the mortgage, and Tony inherits the house.

Revenue would rule that Tony has inherited  50% of the mortgage-free value of the property, i.e. €175,000.

Tony would face an inheritance tax bill of €52,387 which is 33% x  [€175,000 – the tax-free allowance of €16,250]

How can cohabiting couples reduce their inheritance tax liability?

Life of another mortgage protection policies

Tony and Carmela should have bought two single life of another mortgage protection policies and paid each other’s premiums from their own funds.

Had they done so, Tony would be deemed to have inherited 50% of the NET VALUE of the property i.e 50% x (property value €350k – €200k mortgage) = €75,000

The tax liability in this circumstance would be just €19,461  (33% x (€75,000 – €16,025)) instead of €52,775.

That’s a €33,314 saving.

Granted the premiums on two single life policies will be higher than one dual life mortgage protection policy but still, if the worst happens, you will save thousands.

If you get married, you can keep the two single life policies or replace them with a dual policy if you can save a few quid.

3 tips to do battle with the evils of Inheritance Tax

*puts on cape*

Now that we’ve learned about the perils of tax on poor unfortunate cohabiting couples, it’s time to look at three get out of jails.

  1. Dwelling House Exemption, which was introduced in the Finance Act 2016 (who doesn’t love a good Finance Act, whaaaa?).

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 lived in the house for six years after your partner dies.
  1. The redress scheme, which can provide some protection – but as is the way with these things, it only counts if you’re eligible. It covers very official-sounding areas like maintenance orders, property adjustment orders, and pension adjustment orders.

You can read more about it on Citizens Information.

  1. Section 72 Insurance: a type of Life Insurance that’s literally designed to cover Inheritance Tax. Parents will often take out a policy if they know their underlings will be liable to Inheritance Tax. That’s some sound parenting right there.

You can read more about Section 72 Insurance by going here. And yes, it does sound a bit like an unofficial government base that’s possibly stationed right by Area 51, but I promise you it’s legit.

Of course, there is a fourth very obvious option: get married or civil union-ed.

Over to you…

Yes, Inheritance Tax is fairly ridiculous, but the rules are the rules. That’s not to say that there aren’t ways around it. As with all tricky tax issues:

We advise that you seek professional legal and tax advice as the information given is a guideline only and does not take into account your personal circumstances. There could be other assets and inheritances passing on death  which could cause a CAT liability.

And if you are one of those pesky unmarried cohabiteurs (pronounce it like it’s French and it’s a bit less terrible), make sure you get a good deal on your Mortgage Protection. Some things you’ll have no control over – getting a good deal on your Mortgage Protection isn’t one of them!

If you’d like me to take a look at your personal situation and make a recommendation on the types of cover you should consider (FOC), complete this questionnaire and I’ll be right back.

Alternatively, you can schedule a chat here. 👋

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