Tax and a Changing Society

Societal changes happen over time. The Irish family has changed and is continuing to change and the Government believes the law needs to reflect this. This is why in a few weeks there is to be a referendum on same sex marriage. What has not kept pace with changing family dynamics is tax legislation, and failure to be aware of this could prove expensive.

According to the most recent Census, there are 60,000 cohabiting couples and their children in Ireland today. Although there has been changes concerning cohabitants possible legal entitlements in the event of death or relationship break-up, the actual tax treatment of these entitlements has remained unchanged. Cohabitants do not possess the same tax rights as married couples or civil partnerships.

Cohabitants do not have automatic rights under Succession Act Rights legislation, therefore a Will is even more important for cohabitant couples. Cohabitants cannot be assessed for income tax on a ‘joint assessment’ basis. A surviving partner will not receive any pension scheme death benefits their deceased partner may have had, unless they can show financial dependence. A surviving partner who takes a benefit on death of his / her partner will be subject to capital acquisitions tax with only the ‘stranger threshold’ or Category C threshold of €15,075 being available to them.

Often, when reviewing the strategies that cohabitants have in place to protect the financial security of their partner and children in the event of their death, I find that the strategy has been incorrectly set up and will result in a very significant tax bill for the surviving partner. An example can illustrate the potential cost of this error;

A cohabiting couple, Ann and Barry, decide to take out life insurance for a sum insured of €750,000, as they have a child together and in the event of death of either one of them, they wish for proceeds to be available to the other partner to ensure the financial security of their family. The premium for the insurance will be paid from Ann and Barry’s joint bank account. This is a financially responsible decision the couple have taken together. However if it is not set up correctly what will happen is;

Barry dies and Ann gets €750,000. However as they are cohabiting couples, Ann is regarded as having received an inheritance from Barry and the relevant threshold exemption is just €15,075. The Revenue will seek to tax Ann on the €375,000* with a threshold exemption of just €15,075, and with tax at 33% on everything over this. This will mean that Ann will face a tax bill of €118,775. *(ie half the €750,000 as Ann will be deemed to have paid half the premium as it came from the joint bank account)

The terrible thing about this is that it could so easily have been avoided with the right advice. The structure of the insurance could have simply been changed and such a change would allow Ann to receive the full €750,000 without any liability to tax at all, thereby saving nearly €120,000 which has been lost to the taxman.

As society continues to change and family structures become more complicated, a greater number of potential issues need to be examined and considered before financial strategies are recommended and implemented. Things are often not as straightforward as they seem at first glance. One should seek financial advice from an appropriately qualified independent financial adviser.

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Gavin Gilmore trading as Gilmore Insurance & Financial Services is regulated by the Central Bank of Ireland.
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