Manage inheritance tax exposure with a Section 72 policy

A 33% inheritance tax may be due on the value of your assets if you leave them to someone other than your spouse or civil partner. Your home, investments, pensions, and other possessions are examples of assets.

 

When the value of the inherited assets exceeds a predetermined threshold amount, inheritance tax is due to the Revenue Commissioners.

 

This threshold amount for parent-gifted inheritances is €335,000. Inheritances more than this amount are subject to an inheritance tax of 33%.

 

Where the beneficiary is a grandchild, sibling, niece, or nephew of the person who bequeathed them the assets, the threshold amount is €32,500.

 

The threshold amount is only €16,250 for other beneficiaries such as cohabiting couples who are not married to one another. Everything above that is subject to a 33% tax.

 

What is the solution?

 

Inheritance tax may be wholly or partially mitigated by a whole of life insurance policy. To manage beneficiary exposure to an inheritance tax bill the policy needs to be configured as a “Section 72” Life Insurance policy.

 

The Revenue Commissioners have given their approval to this particular type of insurance policy under Section 72 of the Capital Acquisitions Tax Consolidation Act 2003.

 

The assets you leave behind, such as your family home will not need to be refinanced or even sold to pay an inheritance tax bill if the appropriate amount of insurance under a Section 72 policy is in place.

 

The coverage amount selected will depend on:

 

o The value of the assets for which may be subject to inheritance tax.

o The beneficiaries of the assets.

o The amount of inheritance tax that would be due.

o What can be afforded in terms of monthly premium amounts.

 

Note that Section 72 polices can be expensive and the premiums must be paid by the doner. However, simple strategies can be put in place where beneficiaries can assist with costs by gifting the doner (the payer of premiums) and utilising the small gift exemption.

 

The correct level of coverage under a Section 72 Life Insurance policy can prevent beneficiaries from having to sell a portion of their inheritance (often the family house) or from having to take out a loan to fulfil their inheritance tax obligations. This is a tax-efficient alternative.

 

When you pass away, this policy gives a lump payment that your loved ones can use to cover any inheritance taxes. As long as it is used for that purpose, the payment from a Section 72 policy itself is exempt from inheritance tax.

 

Prior to the start of your policy, you must choose to have it set up as a Section 72 Life Insurance policy. It cannot later become eligible for Section 72 status.

 

It is understandable that as time passes, the value of your assets and any potential inheritance tax liabilities can vary. But, after you pass away, your entire cover amount will still be paid out. The full sum is still paid out even if the insurance coverage on your policy at the time is greater than the inheritance tax due. The additional sum might therefore be subject to inheritance tax on the excess.

 

Constructing a Section 72 policy

 

There are several ways that that a Section 72 policy can be set up.

 

1. To protect solely your own life (single life cover). Your policy pays out after your passing.

2. To provide joint life, second death coverage for you and your spouse, civil partner, or former spouse. In this instance, the insurance only pays out after the passing of both the insured parties. Thus, premiums must be paid even after the first individual passes away because there will be no payoff.

3. You should also designate someone as the “trustee” of your policy. A trust is a legally binding arrangement. It enables you to designate trustees who will oversee dispersing the funds to the specified beneficiaries after your passing. MOJO Finance will assist you in completing a Section 72 trust form alongside your application.

 

Does revenue have any related conditions?

 

Revenue do have some requirements and conditions to be aware of as Section 72 policies are essentially deployed to mitigate capital acquisitions tax due:

 

o The coverage amount must be at least eight times the policy’s annual premium amount.

o Payments must be made consistently, on time, and for a minimum of eight years. (i.e., eight-year threshold does not apply if premium payments end because of the cover not being paid.

o Even after the eight-year period, you cannot resume monthly payments if you stop making them.

o Joint life cover is only available where the second party insured is either a spouse or civil partner.

o If your payments are doubled or halved in any eight-year period, your policy may no longer be eligible for Section 72 relief.

 

Have Revenue provided any Recommendations?

 

Revenue recommends that you either:

 

o Place your policy in trust; or

o Prepare a will that specifies that the proceeds of the policy are to be used to pay inheritance tax for beneficiaries. This will ensure that your beneficiaries receive the tax relief offered under Section 72 Life Insurance policy.

 

Example application of a Section 72 policy

 

Upon your passing, your child may inherit a family home worth €750,000 alongside additional assets worth €50,000. This will lead to a €153,450 inheritance tax bill.

 

Your child may have to sell the family home to pay the inheritance tax bill if they don’t have access to that amount. A Section 72 Life Insurance policy will help you avoid this situation.

 

If you pay premiums for a Section 72 Life Insurance policy to cover an expected inheritance tax bill of €153,450, your child would inherit your home and your other possessions upon your passing, and the proceeds of the Section 72 policy would go to Revenue to cover the inheritance tax due.

 

Conclusion

 

A Section 72 Policy should be constructed alongside your financial broker who has expertise in this area.

 

Please feel free to engage with MOJO Finance on this matter who are able to both broker the most cost-effective premiums and to take account of many other details beyond the scope of this article.

Manage inheritance tax exposure with a Section 72 policy