Assets passing on death between married couples or civil partners are exempt from Inheritance Tax. This exemption 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 and the threshold is currently €16,250. Inheritances in excess of this are subject to tax at 33%.
Family Home Relief
The Finance Act 2000 introduced a complete exemption from Inheritance Tax on the value of “a dwelling”, provided the person inheriting the property satisfied certain conditions – basically that it was, and continues to be, their home. This is commonly referred to as ’family home” relief. The relief is available to any individual who satisfies the conditions and not just to qualified cohabitants. To qualify for the exemption the person who inherits* the home must:
- have occupied the house as their sole or main dwelling for three years prior to the date of the inheritance,
- at the date of the inheritance does not hold an interest in any other dwelling house,
- continue to occupy the house as their sole or main residence for 6 years after the date of the inheritance.
What this means is, once a couple have been living in the house for 3 years, regardless of which of them own the house, paid the mortgage or the mortgage protection policy, there will be no Inheritance Tax liability on the value of the house if the above conditions are met.
*Where the dwelling house is passed as a gift during the life of the original owner of the property there are additional conditions to be met
However, if the above conditions are not met then there could be significant tax implications for the survivor. For example, what if one of the cohabiting partners owns other property which also passes to the surviving partner on their death or indeed the surviving partner already has an interest in a property of their own?
John & Mary are not married and buy a house in joint names.
They contribute equally to the deposit, mortgage repayments and joint mortgage protection policy.
John dies in first year of mortgage (house valued at €500,000)
Mary inherits 50% of the property (assuming held as joint tenants)
The mortgage is cleared by the Mortgage Protection policy
The tax threshold for Mary is €16,250
Tax at 33% on remaining €233,750 gives a tax liability of €77,137
Options to cover this liability are to increase the mortgage protection policy or effect a life of another policy. If Mary had made no contribution to the purchase of the house, then she would inherit 100% of the value of house and she would be faced with a tax bill of €159,637.
After three years family home relief may apply assuming all other conditions are met
John and Mary 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 common law partner Mary because she is the surviving policy 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.
Taxable inheritance €50,000
Tax threshold exemption €16,250
The balance of €33,750 is taxed at 33% giving a tax liability of €11,137
John 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 John’s will, the €100,000 is paid to his common law wife Mary
Assuming Mary inherited no other assets, the liability to tax is
Mary’s taxable inheritance is €100,000 Tax threshold exemption is €16,250 The balance of €83,750 is taxed @33% giving a tax liability of €27,637