Why living together could cost you tens of thousands of euro

Marry in haste, repent at leisure as the saying goes. But if you think cohabiting is any less risky than marriage, think again. High rents, big house prices and now a pandemic are driving more lovers to live together than ever. But sharing a home without the legal protection of marriage or civil partnership can be a tricky affair.

“It’s definitely a higher priority to get the house before the wedding,” says financial planner Daniel Hardiman. “I generally see it for individuals in their early 30s who have found that rent is so expensive. Or you might see people in their 40s if there is a separation. I’d say 90 per cent of them are unaware of the tax implications of cohabiting.” Indeed, where the couple breaks up or if one party dies, the financial fallout can be a disaster.

There were 152,302 cohabiting couples recorded in the 2016 census. That’s a fivefold increase on 1996. About half of them have children. At the same time, the number of couples with children opting to get married increased by just 15.6 per cent. So, for many, cohabiting is not a stepping stone. Despite this growing family type, the State continues to give “fiscal preference” to those who are married. Taking steps to protect yourself makes sense.

Married couples and civil partners can inherit millions and mansions from each other and not pay a cent in tax. It's a different story for cohabitees

Hard conversations

Moving in together is a heady time. Choosing furniture, mulling paint colours, your first joint Netflix account are all a thrill. Death and taxes won’t be top of anyone’s list over dinner à deux, but hard conversations can save serious heartache.

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When it comes to couples buying property, the bank doesn’t care if you are married. You don’t even need a joint account, says Michael Dowling of Dowling Financial. “Will their salary cover the mortgage and have they shown repayment capacity, that’s what the bank wants to know,” he says.

When buying a property, cohabitants can choose to do so as “joint tenants” or “tenants in common”. The bank doesn’t care much about that either, but cohabitants should. “You never want to think the relationship will break up or that one of you will pass away, but from day one you need to make provision for what will happen to your share in the property,” says Dowling.

In a joint tenancy, the property automatically goes to the surviving tenant if one of you dies. “If it’s a joint tenancy, no one else can interfere with that, it will automatically vest in the surviving joint tenant,” says solicitor Susan Murphy of Makemywill.ie. So far, so romantic. The only problem is tax. Married couples and civil partners can inherit millions and mansions from each other and not pay a cent in tax. It’s a different story for cohabitees.

“From a tax point of view, you are inheriting the value of a half-share in the property. The tax threshold for inheritance when you are not married is only €16,250. Anything above that amount is taxed at 33 per cent,” says Murphy. So decades-long cohabitees may as well be strangers from a tax perspective.

Dublin has the highest median house price in the country at €375,000, according to Residential Property Price Index figures. Inheriting half of that value from your partner could leave you having to settle a tax bill of about €57,000 on your own home.

In a tenancy in common, the deceased person’s share goes to whoever they have nominated in their will. If that’s you as their partner, you face the same tax hit. If the deceased doesn’t have a will, it automatically goes to their next of kin – that means a blood relative, not you. To continue living in what you see as your house, you may end up having to buy out your partner’s brother first.

The surviving partner may be able to avail of dwelling house relief, says Murphy. This allows someone to inherit a property tax-free if: they have lived in it for three years before the homeowner’s death; they remain living in the house for six years after the inheritance; it was the main home of the person who has died; and the person who inherits the property does not own or have a share in another property at the date of inheritance. So if you still own a one-bed apartment from your single days that you now rent out, it disqualifies you from the relief.

“When you go through the tax consequences with people, more often than not they come back and say, ‘yes, we are going to get married’,” says Murphy. “I’ve had quite a few awkward conference calls where you explain it can save a few hundred grand in tax. That can change their minds very quickly. It’s not very romantic, but there you go.”

Agree to agreement

It’s not easy, but asking your partner to sign an agreement before moving in could make for sounder sleeps. A cohabitation agreement can be entered into by couples where one or both of you own the property. It is legally binding and sets out who put in what, whether the property is held in joint tenancy or in common, and what happens if the relationship breaks down or one of you dies. It can also cover arrangements for children.

“I would recommend a cohabitation agreement for couples, otherwise the Cohabitants Act 2010 could apply,” says family law solicitor Avril Mangan of Mangan & Company Solicitors. “A cohabitation agreement sets out how they own the property. So if we buy a property and you put in €100,000 and I put in €200,000, that is all documented.”

For some cohabiting couples, the house they share is owned by just one of them. “In most cases, people are shocked that their cohabitant has rights, that’s the big problem,” says Mangan. “If you go into a relationship you need to know that the person can acquire rights.

“If you are living with someone for two years with a child, or five years if there are no children, and you are not married to somebody else, if the relationship breaks down and one of you is deemed to be a qualified cohabitant, they can have rights that are akin to spousal rights,” she says of the 2010 Act.

Mangan says the key point is dependency. “If you live with someone for 20 years, you’ve given up your career, you’ve stayed at home, you’ve been ostensibly a wife, but they decide, ‘I’m done, off you go now’, the law is there to protect you.” While the legislation is very untested, she says, the court can make orders in relation to maintenance or the property.

If you have a cohabitation agreement, it will set out what happens when you break up. “It can be as simple as saying you both contract out of the 2010 legislation but if you don’t contract out, you are in it.”

For a valid cohabitation agreement, both partners must have had independent legal advice and the agreement must be signed by both of you.

Parental gift

For some couples buying together, one of them may be lucky enough to get a lump sum from a parent towards the home. If the couple owns the property as tenants in common with the property divided 50 per cent in each of their names, things can get tricky if there is a split. “If the other person doesn’t want to be honourable, they could say ‘that gift from your parents was to both of us’,” says Mangan. A cohabitation agreement could have clarified this.

“If a couple buys a property, it just makes sense to enter a cohabitation agreement. I know when people buy together they think everything is going to be wonderful, and a lot of the time it is, but it just makes sense to regularise it and put in place an agreement that will sit in the cupboard.”

In another example, a mother and child were living in a property owned by her parents. A new partner moving in can acquire rights to that property over time, making things difficult if there’s a split. “If you are not marrying somebody, take the opportunity to enter into an agreement that sets out clearly what your position is while you are still happy and before you have a row,” says Mangan.

Mortgage protection

When buying a house together, you will need mortgage protection cover to ensure your mortgage is paid off if you die. If you die, the money gets paid to your lender to clear your mortgage. Cohabitants should seek broker advice to avoid a significant tax bill if one partner dies, says Hardiman.

Take John and Mary, who own a house worth €400,000 as joint tenants. If John dies, Mary inherits half a share in the house equal to €200,000. As Mary and John had lived together for less than three years, Mary doesn’t qualify for the dwelling house exemption and is hit with an inheritance tax bill of about €60,000.

A solution to this would have been if each partner had taken out separate “life of another” insurance policies, says Hardiman. This is where Mary insures John’s life and John insures Mary’s life. “If John died, Mary would be deemed as the policy owner of the life insurance policy with no capital acquisitions tax due on the proceeds. She could use these proceeds to pay the €60,000 tax bill on John’s share of the house.”

Mary doesn’t have to pay tax on the proceeds of the life policy but she does have to pay inheritance tax on inheriting John’s half of the house.

Dowling says it is key that each partner pays such a policy from their own bank account. “Couples often have a joint bank account and pay all their bills from it but to avoid this tax liability it’s vital that Mary pays the policy on John’s life from her sole account and vice versa.”

The mortgage protection policy should also be assigned to the lender so that the proceeds can clear the mortgage, says Hardiman. If it’s not, the proceeds get paid to the surviving partner, triggering a capital acquisitions tax liability, even if the money is subsequently used to clear the mortgage.

Moving on

Cohabiting couples who outgrow a starter home they jointly own may go on to rent it out. Neither married nor in a civil partnership, the income and expenses from the property will be split 50/50 between them – so that’s two tax returns, says Marian Ryan of Taxback.com.

Where one owns a property from their single days, there is no benefit to transferring this into joint names. “You would effectively be gifting part of the property so it would be subject to capital acquisitions tax,” says Ryan. Also, ownership of this property won’t automatically transfer to your partner on your death unless your will says so. And the tax threshold for inheritance when you are not married is only €16,250, with anything above that taxed at 33 per cent.

Protections for married couples and civil partners are strong and some cohabitants mistakenly believe they have the same. Better recognition of the growing number of cohabitants is overdue.

In the meantime, get your affairs in order or put a ring on it.