Inheritance Tax Planning

Capital Acquisitions Tax (CAT) has changed drastically since 2008, giving rise to substantial tax due in the passing of an estate. Subsequently, life companies have emerged with improved tax efficient solutions.

Changes in Taxation
In 2008, a child could inherit up to €521,208 free of tax with any surplus subject to taxation at just 20%. Today, a child’s taxfree inheritance is limited to €320,000, with any surplus subject to taxation at 33%.

In 2017 alone, Revenue received €460 million in receipts from CAT, 53% of which were paid by Group B (see table below). Growth is expected in receipts from Group C with the rise of cohabitating couples.

Where the valuation date of an inheritance is between 1 January and 31 August, the deadline for CAT payment is 31 October in that year. To avoid Revenue surcharges, families are often forced to dispose of assets or effect loans to meet the CAT deadline.

​How to plan for Inheritance Tax
Section 72 of Revenue’s CAT Consolidation Act of 2003 stipulates that if a life assurance policy meets certain criteria, the proceeds are paid to your beneficiaries free of tax when used to offset inheritance tax. Life companies refer to these policies as Section 72 policies. Simply put, Section 72 policies are whole of life policies effected in trust to pay inheritance tax.

Section 72 policies provide liquidity to an estate, allowing beneficiaries ample time to sell assets favourably or to keep sentimental assets (such as a family home). Leaving a smaller inheritance with the tax prefunded leaves your beneficiary in a better position than leaving a larger estate with a looming tax bill.

Proceeds of a Section 72 policy are not subject to probate and only require a trust, detailing beneficiaries and their respective proportion of the proceeds. Any proceeds of a Section 72 policy in excess of the actual tax bill form part of the estate which may then be subject to tax.

As Section 72 policies are life assurance contracts, rates are affected by age and health status. A couple aged 45 at the time of purchase will pay less over the lifetime of the policy than a couple aged 60 at time of purchase even considering the additional 15 years of payments. Consideration is recommended before you approach retirement. Maximum age of application is 74.

Advances in Section 72 Approved Products
In years past, Section 72 approved life assurance policies were complicated and often structured in a way that became unaffordable as the policy owner aged. These life policies were referred to as “reviewable” policies and many are still in force across Ireland.

Three providers in the Irish market now offer guaranteed whole of life policies approved for Section 72.

One of the three providers offers substantial transparency and flexibility with an option they call “Life Changes”.

• The Life Changes option guarantees the premium remains level and outlines the most you will ever pay into the policy from inception; payments cease upon your 100th birthday while cover continues in full.
• In addition, the Life Changes opon allows the policy owner to cease premium payments at any time, after the policy is in force 15 years, in exchange for: 
  (a) Lump sum encashment
  (b) A reduced death benefit.
  No encashment value or life cover will remain if premium payments cease before the end of the 15th year.

CASE STUDY:
John and Mary both 45 years old with two children and an estate valued at €2m. They wish to leave their estate equally between their children. Assuming current CAT rules, their children will have a total tax liability of €448,800.

John and Mary effect a Section 72 policy with a death benefit of €448,800.

• If John and Mary choose a policy with the Life Changes option, the policy guarantees they will pay no more than €263,549 in premium payments.
  
• • Should the value of their estate increase, they can increase the death benefit by up to €200,000 over the life of their policy, subject to policy terms and conditions.
  
• At age 75, having paid €139,384 in total premium, the following scenarios apply:
  > If they both were to pass, their children receive €448,800, eligible for tax relief.
  > If they wish to encash, they receive a lump sum payment of €125,827.
  > If they wish to stop premium payments and keep life cover in place, their children receive €261,175 upon their passing, eligible for tax relief.

The case study illustrates guaranteed values based on a joint life, second death policy for a 45 year old couple, nonsmokers in standard health. All Section 72 approved life policies are subject to underwriting. Rates valid as of April 2019 and inclusive of 1% government levy. Revenue guidleines can be found at revenue.ie

roshea@olearylife.ie