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Death, taxes and life insurance: Why it is costing you not to get married

Change may be afoot, but there is no doubt that cohabiting couples lose out financially when compared to married people

Does it cost you not to get married if you are in a long-term relationship? Last week, we looked at the financial and legal aspects of getting married: this week, we look at similar scenarios for those who are not.

In general, there is no doubt that cohabiting couples can lose out both financially and in terms of their rights when it comes to inheritance/asset splits etc.

“I think for people [cohabiting couples] with wealth of a degree, that they would want to pass it to each other, in terms of a death, then you’re leaving yourself in quite a difficult position,” says Mairead Harbron, a partner with PwC Private. Harbron says that from a pure tax perspective, marriage “absolutely makes sense, as without those valuable spousal exemptions, you’re quite limited in terms of sheltering your exposure”.

But should this be the case?

“It does raise the question as to whether or not current tax legislation is fit for purpose,” Harbron says, adding that while you cannot have “exemptions or reliefs for everything”, she suggests that the current regime does warrant more consideration.

Change – albeit of a limited nature – could be on the way following a court ruling on eligibility to the widow’s/widower’s pension earlier this year.

Income tax

There are no specific benefits to being in an unmarried relationship from a tax perspective, as both parties will be treated as single people for income tax purposes.

This means that if unmarried, you will lose out on standard rate band extensions, which allow a couple to earn a greater amount of income at the 20 per cent tax rate.

Unmarried couples also lose out on other initiatives, such as the home carer tax credit, as to avail of this, you must be married and be jointly assessed for income tax.

For Harbron, this restriction of the home carer tax credit to married couples may now be seen as a bit of an anachronism.

“It is unusual that it should only apply to a married couple, as it relates to taking care of someone who is dependent,” Harbron says.

Unmarried couples also do not benefit from the spousal exemption, which allows the tax-free transfer of assets between couples, be it capital gains tax (CGT) or capital acquisitions tax (CAT), both levied at a rate of 33 per cent.

However, there may be ways of avoiding CGT/CAT on transfers of assets between partners, as courts can make three orders for qualified cohabitants, in relation to maintenance payments, property adjustment orders and pension adjustment orders.

To be deemed as a qualified cohabitant, you must have been in relationship for at least two years, either same sex or opposite sex, where you and your partner are parents of one or more dependent children. Or, five years in all other cases. The relationship must have been ended by death or separation, and neither person may have been married to, or living with, another person in four of the five years before the relationship ended.

However, to avail of such reliefs that automatically apply in a marriage, cohabitants have to go down a legal route. And if making a claim, you will have to show you are financially dependent on the other partner.

Pensions

If you are unmarried, you might lose out on any spousal benefits, such as a spousal payout on an annuity, or the transfer of a pension to a spouse in the event of the death of a partner. And tax issues may arise on any pension benefits that are transferred.

When it comes to welfare payments, until recently, you would not have entitlement to claim a widow’s/widower’s or surviving civil partner’s pension. Moreover, cohabitants are not eligible for the widowed or surviving civil partner grant, a once-off payment worth €8,000 to surviving spouses with dependent children.

However, change is afoot, at least on this front. Earlier this year, the Supreme Court found the relevant social welfare legislation, which excluded unmarried partners from claiming the widow’s/widower’s pension, upon the death of one, unconstitutional.

Sinéad Lacey of the Free Legal Advice Centre acted for Joe O’Meara, who took the case following the death of his partner Michelle Batey.

Now the Department of Social Protection and the Office of the Attorney General are working on amending legislation. According to a spokeswoman for the department, “this is being done with all expediency”.

Once in place, it will means that entitlement to the benefit is likely to be on similar qualification grounds as other welfare benefits paid to cohabitants.

But does it mean that other ways in which married and unmarried couples are treated may change? Lacey does not think so, pointing to the specifics in this case.

“One of the aspects of this, is that for most payments under the social welfare code, you don’t have to be married to qualify,” Lacey says. This meant that the payment was a bit of an outlier. Another aspect of the case, she says, is that children were involved. They qualified for an uplift in the widow’s/widower’s payment – but were being excluded on the basis that their parents were not married.

“It was more about the children being denied access to support,” Lacey says, adding that “that particular idea of discrimination against non-marital children is anathema at this stage.”

However, it may change things over time. “It does potentially loosen up the case law, and allows for a space in which someone else might litigate,” she says.

Death

It is often accepted that if you are not married, then you will have to bear the full brunt of inheritance tax should your partner die.

This can be a significant burden, as if you are not married, your partner will be treated as a “stranger” under inheritance tax law. This means that they will have a tax-free allowance of €16,250 (it has increased by just €1,175 since 2015).

“It’s not a lot,” says Harbron. Once the tax-free allowance is deduced, tax at a rate of 33 per cent will have to be paid on the rest of the estate.

For example, leaving a house or estate worth €350,000 would result in a tax bill of more than €100,000.

But this is not always the case.

First of all, you might jointly own your house. In such cases, whereby items were jointly owned, these will automatically pass to the surviving cohabitant and will not form part of the deceased’s estate. As this passes outside the estate, no CGT will be due – but CAT might apply.

Furthermore, unmarried couples may be able to avail of the dwelling house exemption to transfer a principal private residence free of tax. However, this is quite restrictive, as it was not introduced to facilitate cohabiting couples.

According to Harbron, you must fulfil a number of requirements to avail of the exemption. These include: the property has to be the main home of the person who died; the person who is inheriting it has to have lived in the house as their main residence for three years immediate to the death; and the person inheriting must not have an interest in another house.

In addition, the surviving partner has to continue and live in the house for a subsequent six years – otherwise there will be a clawback of relief.

While you can sell the house, and reinvest the proceeds in a new home, you must reinvest the full amount. As Harbron points out, if you sell a house for €500,000, and reinvest €400,000 in a new home, then there will be clawback on the €100,000 difference.

There could be scope for a better system of tax relief for unmarried couples, Harbron says. “I absolutely think there should be something there for long-term cohabitants.”

You may also face a tax bill on a life insurance policy. If, for example, one partner’s life is insured for €300,000, the other partner will face a tax bill of 33 per cent, or some €99,000, on it. However, according to broker Nick McGowan of Lion.ie, a work around for this is to take out two “life of another” policies – that is, you pay to insure your partner’s life.

“If they do so, the surviving partner will receive any pay out tax free because they are the beneficial owner of the policy,” says McGowan.

It may cost more to take out single life policies, compared to one joint policy, but it could lead to hefty tax savings.

Another issue that can arise is when it comes to your right to inherit. If you have a will, this can protect the rights to inherit of the surviving partner, as otherwise, the surviving partner has no automatic right to a share in the deceased partner’s estate.

“It’s critical to have a will,” says Harbron, adding that for unmarried couples, “without a will there is no provision under the Succession Act”.

So, you might need to get a court order to protect your interest. Otherwise, the estate of the person who died might go to their children, if they have them. If not, it could go to their brothers and sisters, says Harbron, and after this, their parents.

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