Assets passing on death between married couples or civil partners are exempt from Inheritance Tax. BUT this only applies in the case of “legal spouses” and same sex registered civil partners. All other couples are treated as strangers for Inheritance Tax purposes.
The stranger threshold for Inheritance Tax is currently €16,604. Inheritances in excess of €16,604 are subject to tax at 25%.
Will you have to pay inheritance tax on the death of your partner?
On the death of a non married partner Inheritance Tax will be payable on the total value of all assets, regardless of how long the couple have lived together. With the possible exception if the family home, where a ‘co-habiting partner’ inherits other property, or a death benefit under an insurance policy, the €16,604 threshold could easily be exceeded.
John Brown takes out Life Cover of €100,000 on his own life and pays the premiums by direct debit from his own bank account.
John dies and based on the terms of his Will the €100,000 is paid to his partner Mary Smith.
Assuming Mary inherited no other assets, her liability to tax is as follows :
Mary’s taxable inheritance is €100,000.
Threshold €16,604 exempt
Balance €83,396 taxed at 25% = €20,849
Mary’s liability to Inheritance Tax on the policy proceeds is €20,849
John Brown and Mary Smith take out “Dual Life” Cover of €100,000
John and Mary are joint owners, and pay premiums out of their joint account.
John dies and the €100,000 is paid to his partner Mary Smith because she is the surviving owner. Assuming Mary inherited no other assets, and Revenue agree that she has paid 50% of the premiums, she will be taxed on 50% of the benefit.
So, her taxable inheritance is €50,000.
Threshold €16,604 exempt
Balance €33,396 taxed at 25% = €8,349.
Mary’s liability to Inheritance Tax on the policy proceeds is €8,349
Mary Smith takes out a “Life Policy” with Life Cover of €100,000 on John Brown’s life i.e. Mary is the proposer / policy owner with John as the life assured. Mary pays the premiums from her own bank account. John dies and the €100,000 is paid directly to Mary Smith, as she is the legal owner of the policy.
Mary has no liability to Inheritance Tax, as she is both the person who receives the death benefit and the person who paid the premiums.
When putting in place additional “family protection” type cover arranging the cover on a single life “life of another” basis will avoid any potential liability to inheritance tax but only where the policy owner actually pays the premium i.e. the policy owner must have independent financial means. If the policy is effected on a dual life basis then the cover will need to be increased to take into account the potential tax liability. The amount of increased cover will again depend on the percentage inherited by the survivor and what, if any, contribution they have made to the policy.
If you think this affects you I would invite you to contact me with a view to reviewing your family and mortgage protection arrangements to ensure that you and your family receive the proceeds of your life assurance policy when you need it most in the most tax efficient way possible.
The legal and tax information included in this document is correct as of November 2011. The examples included are for guidance purposes only and are not based on any real individual circumstances and should not be constituted as advice in any particular instance.
You should talk to a solicitor if you do not have a valid Will or if your current Will needs to be updated.