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 tax-free inheritance is limited to €335,000, with any surplus subject to taxation at 33%.
In 2017 alone, Revenue received €460 million in receipts from CAT, with rise expected from 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.
CAT thresholds for inheritances or gifts
Child €335,000
Parent, brother, sister, niece, nephew, grandparent, grandchild €32,500
People with a relationship not already covered (Cohabitating partner) €16,250
Solution
Section 72 of Revenue’s CAT Consolidation Act of 2003 stipulates that if a life insurance 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. Section 72 policies must be designated as such at inception for the proceeds to be paid tax free. Any proceeds of a Section 72 policy in excess of the actual tax bill form part of the estate and are then may 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 Policies
In years past, Section 72 approved life insurance 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. (O’Leary Life LTD, do not recommend reviewable policies)
The impact of the market downturn and the trajectory of CAT receipts led life companies to develop guaranteed whole of life policies.
Three providers in the Irish market now offer guaranteed whole of life policies approved for Section 72.