Inheritance tax & cohabiting couples

Crowe tax partner answers an Irish Independent reader’s question on inheritance and tax. Article published on 3 February 2020.

Question: A friend of ours passed away recently. He had been married and his spouse passed away. Since his spouse died, he met someone else and has been cohabiting with his partner for over 20 years. He left his house to his daughter and his partner in his will. His daughter's share is under the CAT threshold for Parent / children, but the Revenue has said his partner's share is to be taxed as a stranger and she will have a tax bill of approximately €40,000. His partner has been acknowledged as cohabiting for other social welfare purposes and documentation / testimony has been provided from several sources to confirm they have been co-habiting - but this has been ignored by the Revenue. Surely if a person is cohabiting in the eyes of one arm of the State, they should be treated this way for all? Linda, Co. Dublin.

Answer: Whilst some progress has been made in addressing certain tax issues facing cohabitating couples, Revenue have yet to extend the tax reliefs available to married couples in respect of gifts and inheritances to cohabitating couples.  

Unfortunately, for Capital Acquisitions Tax (CAT) purposes, cohabitants are regarded as ‘strangers in blood’. Gift and inheritances between cohabitants therefore do not qualify for the exemption from CAT that applies to married couples. Cohabitants are subject to the Group C CAT threshold of €16,250. Inheritances in excess of this threshold are taxable at 33%. 

In these specific circumstances, the individual’s partner may qualify for the Dwelling House Exemption if certain conditions are met. His partner will be exempt from CAT where the house she inherits was the main home of her partner prior to his death and she had also lived in the house as her main home for the three year’s prior to his death. She must not have an interest or share in any other house and she must continue to live in the house for six years after the date on which she received the inheritance. 

If the Dwelling House Exemption does not apply, his partner will be liable to pay 33% CAT on the value of the inheritance that exceeds €16,250. 

Lastly, there may be scope to make a claim in accordance with the Redress Scheme for Cohabitating Couples.  The aim of this scheme is to provide protection for a financially dependent member of the couple if a long-term cohabiting relationship ends either through death or separation.  Where a property adjustment order is made under this scheme against the estate of a deceased individual, there are no inheritance tax issues for the surviving cohabitant.  

If you have any questions regarding inheritance tax or personal tax planning contact a member of our tax team.