What is Section 72 Inheritance Tax Life Insurance?
Tax, tax, tax, no one likes paying it.
We pay tax our whole lives, literally.
Income tax, USC, VAT, literally a tax on everything.
As well as that, when we pass away, part of the value of our estate can be subject to tax.
Capital Acquisitions Tax or otherwise known as Inheritance Tax.
A whopping 33% tax rate.
So, after paying taxes our whole lives, the tax man still wants over one-third of the value of our estate.
Despite this, we have tools in our bag to combat this and minimise what goes to the tax man.
One of these tools is a Section 72 Inheritance Tax Life Insurance policy.
Let’s take a look.
What is capital acquisitions tax?
Firstly, what is Capital Acquisitions Tax (CAT) or Inheritance Tax?
Simply, it’s a tax on gifts and inheritances over certain limits.
The tax rate over certain thresholds is 33%.
Example
As a simplified example, let’s assume you own a house valued at €500,000 (there are plenty of these across the country).
When you pass away you plan to leave the house to your child.
You eventually pass away and your child inherits the house and has received no other gifts or inheritance from you.
The tax free threshold for a child is €335,000.
Thus, your child receives the house and an inheritance tax bill for a cool €54,450 (€500,000 less €335,000 x 33%).
Furthermore, your child doesn’t hold €54,450 cash to pay the bill.
They then have to sell the family home to pay the bill.
Therefore, in this example, after paying tax your whole life, the taxman still wants 33% of your assets.
What is Section 72 Inheritance Tax Life Insurance?
Firstly, in its simplest form, Section 72 Life Insurance is simple a life insurance policy.
Written for no fixed term but for the whole of your life.
In addition, written under Section 72 of the Capital Acquisitions Tax Consolidation Act 2003.
You pay the premium, you get the cover you’ve requested.
Then, when you inevitably pass away and it pays out, it’s used to clear or reduce an inheritance tax bill that applies to the beneficiaries of your estate.
As a result of it being written under Section 72, it’s exempt from inheritance tax.
Once it’s used towards an inheritance tax bill.
How much cover do you need?
Pretty straightforward this one.
How much inheritance tax do you think will be owed on your passing?
For instance, if your estimated tax bill is €100,000, have €100,000 cover or less.
Cost is a big factor here in terms of how much cover you have.
How Much Does a Section 72 Inheritance Tax Life Insurance Plan Cost?
As with any life insurance policy, it varies.
Some factors that influence the cost, but not limited to are the level of cover you need, your age, whether you smoke or not and how healthy you are.
Dependent on your health status, the cost could be higher than anticipated.
Understandably, the larger the cover, the higher the cost.
Who can take out a Section 72 Inheritance Tax Life Insurance Plan?
The policy holder must be the person (or couple) who is leaving the inheritance.
If the individual is single, you set it up on a single life basis.
If you are a married or civil partnership couple, there is no CAT between spouses.
As a result, you set it up on a joint life second death basis.
Can children pay for the Section 72 Inheritance Tax Life Insurance Plan?
Right, so if you’re thinking, ‘my children will benefit from this, they should pay for it!’.
Strictly speaking, they can’t cover the cost, however, technically they can via a loophole.
Everyone can avail of the small gift exemption.
This is where anyone can gift anyone €3,000 per annum.
Consequently, a child could gift their parents the cost of the plan.
Therefore, they’re essentially saving now to cover a large tax bill they will get down the road.
Advances in modern day Section 72 Life Insurance Plans
Historically, Section 72 policies could be complicated.
These policies had a ‘reviewable’ premium where the rate of premium increased as the risk to the insurer paying out increased.
It doesn’t take a rocket scientist to work out that the risk to the insurer paying out increased as the policyholder aged.
Consequently, at some point, the plans became unaffordable and had to be cancelled. A waste of money.
Now, the premiums are no longer reviewable and are now ‘guaranteed’.
There is a guarantee that they cannot be reviewed in future.
Furthermore, one provider provides a real unique benefit.
A benefit that gives the plan holder more control.
Circumstances change, tax thresholds can change, the value of peoples estates can reduce.
If you hold the plan for a minimum 15 years and cancel, you can get a cashback amount and cease the cover.
What about My Approved Retirement Fund (ARF)?
If you hold an ARF that is going to go to a child over age 21 on your death, you should know a 30% tax rate applies.
If you don’t, you need to question your advisor.
Anyway, a Section 72 Life Insurance Plan is a clever way around this.
One can use a Section 72 Plan to cover this tax.
Example
You worked hard, paid your taxes, built up your pension and received your tax free cash.
As a result, you have an ARF investment, €100,000.
You plan to leave this to your child who is over 21.
When you inevitably pass away, they will receive €70,000 (€100,000 value less 30% tax).
However, if you have a Section 72 Plan for €30,000 cover, it can clear this €30,000 tax bill.
Consequently, your hard earned pension is protected from the tax man.
Why take out a Section 72 Inheritance Tax Life Insurance Plan?
They can save alot of money and potential issues in future.
Imagine your beneficiaries, likely your children, having to sell the family home or part of your estate just to clear a CAT bill.
Section 72 plans around this.
It is a good way to get cash off your own balance sheet to your kids tax efficiently.
Is it worth it?
The big issue tends to be affordability with them.
As it’s an insurance policy, you could pay more than what eventually pays out.
This is assuming you live long, really long!
The break even point (for want of a better phrase), tends to be somewhere between 30 and 40 years.
But yes, as part of an overall strategy, they are worth it.
Summary
In conclusion, is a Section 72 Inheritance Tax Life Insurance Plan a silver bullet to estate planning? No.
Is it perfect? Again, no.
Is it useful? Very.
As part of an overall estate planning strategy, this cover can be very effective.
As mentioned above, it’s a really good way to get money off the balance sheet to help clear or reduce your children’s potential future tax bill.
Parents take out this cover with their children in mind.
Children take out this cover on their parents (by way of small gift exemption, see above) as part of a strategy planning their own future.
How We Help
Are you concerned about a potential CAT bill you’ll leave behind?
Maybe you hold an ARF and don’t fancy leaving 30% of it to the tax man and want to plan a bit better?
We can help talk you through these issues, what you should be considering and what you should and shouldn’t be doing.
Get in touch
To discuss further email us at info@fortitudefp.ie or request a callback.
Alternatively, you can get us on 086 0080 756 or access our diary here and book a call at your convenience.
Why not visit our insights.
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