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01st June, 2023
At Davy, we work with you to identify and help you to achieve your financial goals. An important objective of protecting your wealth is to minimise the financial consequences of inheritance tax (IHT) for your children
A child can receive €335,000 from their parents in their lifetime. Gifts or inheritances in excess of this are subject to tax at 33%. Therefore, putting a tax-efficient estate plan in place is as important as writing a clear and concise Will.
Section 72 policies are a specific type of life policy, which represent a significant tax planning opportunity to assist in protecting wealth. Contracts are set up on a ‘whole-of-life' basis. Depending on the structure of your Will, most Section 72 policies are set up on a ‘joint life, second death’ basis.
Upon the death of the second life assured, the value of the sum assured is paid out and used to pay the inheritance tax due on the passing of assets from deceased parents to children. The policies are currently exempt from inheritance tax to the extent they are used to pay inheritance tax liabilities.
Section 72 premiums can vary, but once the premium is agreed, it is fixed for the life of the policy.
If you know that there will be a defined amount of cash available from the Section 72 policy to meet any inheritance tax bill arising, then tax can become less of a determining factor when considering how to distribute your estate.
Inheritance tax may be payable within a very limited timeframe, depending on the date of probate. Section 72 policies can be particularly useful in situations where assets are illiquid, (e.g. property, or businesses).
Your beneficiaries may struggle to raise enough cash to pay their inheritance tax (also known as Capital Acquisitions Tax (CAT)) bill in time. A Section 72 policy can potentially provide the necessary tax-free cash to meet the CAT bill when it is due, without having a fire-sale of assets.
|Both aged||Annual Premium||Breakeven|
This example is for €1m of cover, and is for illustrative purposes only. Pricing is indicative only and is not guaranteed. Breakeven indicates the number of years the individuals would have to pay the premium for before they would have the same amount in premiums that the sum assured will pay out. Source: Clearchoice, March 2023.
The table highlights how sensitive pricing is to age – with every birthday, premiums can be expected to increase. However, once the contract comes into force the annual premium is fixed at that price for the life of the policy.
You need to be prepared to undergo once-off medical underwriting with a doctor. Depending on the outcome of the medical, a loading may be applied or cover may be denied.
You must also be prepared to pay annual premiums for the rest of your lives, otherwise the policy will lapse without value. It is important to consider affordability of the premium in the context of your overall financial plan and assess the impact of paying the premium on the value of your estate.
Section 72 represents a potentially valuable tax planning opportunity and should be considered as an integral part of your estate plan.
To find out more about how we can help you put in place a tax-efficient estate plan, contact your existing Adviser if you are an existing client. If you’re new to Davy, why not request a call?.
WARNING: The information in this article is not a recommendation or investment research. It does not purport to be financial advice and does not take into account the investment objectives, knowledge and experience or financial situation of any particular person. There is no guarantee that a financial or investment plan will meet its objectives. You should speak to your advisor, in the context of your own personal circumstances, prior to making any financial or investment decision
WARNING: Tax information provided/discussed in this article is provided for Irish Resident investors only by way of general guidance only and is neither exhaustive nor definitive and is subject to change without notice, including potentially retrospectively. It is based on Davy’s understanding of Irish Tax legislation, provided to Revenue.ie as at 26th May 2023. It is not a substitute for professional tax advice. Please note that Davy does not provide tax advice. You should consult your own tax advisor about the rules that apply in your individual circumstances.