Why Cohabiting Couples in Ireland Should Have Separate Mortgage Protection Policies

Introduction

Buying a home together is an exciting milestone for any couple. But if you and your partner are not married, it’s crucial to understand how mortgage protection and inheritance tax could impact you. Many people assume that if one partner passes away, the other simply inherits their share of the home without issue. Unfortunately, for cohabiting couples in Ireland, that’s not the case.

In this article, we’ll explain why it’s important for cohabiting couples to take out separate mortgage protection policies, how Irish tax law affects unmarried partners, and what steps you can take to protect your home and your financial future.

John & Mary’s Story: A Real-Life Example

John and Mary have been together for years and decide to buy their first home together in Dublin. They find a beautiful house valued at €400,000 and take out a mortgage of €350,000. Like many couples, they assume that taking out a joint mortgage protection policy will cover them in the worst-case scenario. However, they don’t realise the tax implications of their arrangement.

Tragically, a few years later, John passes away unexpectedly. Their joint mortgage protection policy clears the mortgage, meaning Mary now owns the home outright. However, the tax authorities view John’s 50% share of the home as an inheritance, meaning Mary now owes tax on his €200,000 share.

How Irish Inheritance Tax Affects Cohabiting Couples

Married vs. Cohabiting Couples: A Key Difference

In Ireland, when a married person or civil partner dies, any assets they leave to their spouse or civil partner are completely exempt from inheritance tax (Capital Acquisitions Tax, or CAT). However, cohabiting couples do not receive this exemption.

Under Irish tax law, cohabiting partners are treated as “strangers” when it comes to inheritance. This means that if one partner inherits the other’s share of the home, they must pay inheritance tax on the value of the inherited portion, minus a small tax-free threshold.

How Much Tax Would Mary Owe?

• Value inherited: €200,000

• Tax-free threshold (Group C for cohabiting partners): €20,000

• Taxable amount: €180,000

• Inheritance tax at 33%: €59,400

This means that despite paying the mortgage together, Mary now faces a tax bill of nearly €60,000 just to keep the home they shared.

How to Avoid This Tax Bill: The Best Mortgage Protection Strategy

The good news is that there’s a simple way to avoid this situation: take out two separate mortgage protection policies on a ‘Life of Another’ basis.

How It Works

Each partner takes out a mortgage protection policy on the other partner’s life for the full mortgage amount. Importantly, each person also pays for the policy themselves. This ensures that if one partner dies, the other receives a tax-free payout and can pay off the mortgage without any inheritance tax liability.

However, while this approach eliminates inheritance tax on the mortgage balance, the surviving partner will still inherit their deceased partner’s share of the property’s equity, which is subject to tax.

Updated Tax Calculation with ‘Life of Another’ Policies

• Home Value: €400,000

• Remaining Mortgage at Time of Death: €350,000

• Equity in Home: €50,000 (split 50/50)

• Surviving Partner’s Inherited Equity Share: €25,000

• Less Group C Tax-Free Threshold: €20,000

• Taxable Amount: €5,000

• Inheritance Tax Due (33%): €1,650

While the tax bill is significantly reduced, it does not disappear entirely. That said, for those looking for an even simpler solution—getting married would remove the tax liability completely! Not the most romantic reason to propose, but it’s certainly a financially strategic one.

Comparing Your Mortgage Protection Options as a Cohabiting Couple in Ireland

Key Takeaways for Cohabiting Couples Getting Mortgage Protection in Ireland

• Joint mortgage protection doesn’t solve the inheritance tax issue for unmarried couples.

• If you inherit your partner’s share of the home, you could owe 33% tax on the value above €20,000.

• The best solution is to take out two separate ‘Life of Another’ mortgage protection policies.

• Each partner should pay for the policy on their partner’s life to ensure the payout is not taxed as inheritance.

• Even with separate policies, there may still be a small tax bill on inherited home equity.

• Getting married would eliminate this tax liability completely—not the most romantic reason to propose, but financially it makes a lot of sense!

Final Thoughts on Mortgage Protection for Cohabiting Couples

Buying a home together is a major commitment, and ensuring your partner is financially protected is just as important as choosing the right property. If you’re a cohabiting couple in Ireland, reviewing your mortgage protection setup now can save you thousands of euros in the future.

If you have any questions about setting up the right mortgage protection policy for your situation, contact Family Cover today for expert advice.

You can phone a QFA qualified adviser now on 01 668 6136 or book in a Zoom meeting here.