Many cohabiting couples could find themselves in a very difficult position when it comes to inheritance tax. Should you and your partner have never married, you could face a substantial inheritance tax bill when your partner passes away — even if you have lived together for many years and have had children together. You could even face a major inheritance tax bill when the family home passes to you, particularly if you and your partner did not buy that home jointly.
Married couples and civil partners have a big tax advantage over unmarried couples: a spouse or civil partner does not have to pay inheritance tax on anything left by the deceased partner to him or her (though a divorced or separated spouse may have to). The surviving partner in a cohabiting couple, however, does not enjoy the same automatic exemption from inheritance tax as spouses and civil partners do.
“Partners in cohabiting couples are effectively strangers for the purpose of inheritance tax as they are not blood relatives and they are not married,” said Oonagh Casey Grehan, partner with Fagan & Partners. This means that, typically, the most that a partner in a cohabiting relationship can inherit from the other tax-free is €16,250, according to Casey Grehan.
So, if you have lived for many years in a property which was owned by your partner, and that property has become the family home, you could have to pay inheritance tax at a rate of 33pc on most of the value of that property (bar the first €16,250 of it) if it is left to you. So you could find yourself in a situation where you have to sell the family home to settle the inheritance tax bill.
You may be able to inherit the home tax-free if you qualify for a tax break known as the dwelling house exemption. However, there are strict conditions around this tax break and just because you have lived in the home for many years doesn’t mean you automatically qualify for it.
For example, should you own or have a share in another dwelling property, you won’t qualify for the dwelling house exemption. This applies whether the other property is located in Ireland