Planning for inheritance tax can be a complex and crucial aspect of estate planning, especially as property values continue to rise in Ireland. With the tax-free threshold on inheritance increasing to €400,000 in 2024, more beneficiaries are finding themselves subject to a 33% tax bill on any amount exceeding this threshold. This has led to a significant increase in the number of people paying Capital Acquisitions Tax (CAT), with 15,000 individuals paying in 2023, a 36% rise from a decade earlier. The trend is expected to continue, with receipts topping €1 billion for the first time in 2025, indicating a growing need for effective tax planning strategies.
One approach is to save a lump sum specifically for tax settlement, but this comes with its own tax implications. For instance, saving €100,000 to gift to children would generate a tax bill of €33,000 if they have already surpassed their tax-free thresholds, as David Byrne, savings and investment propositions lead at Aviva, points out. This highlights the need for alternative strategies.
Section 72 Policies:
These are insurance policies designed to cover the cost of settling inheritance tax bills. They are structured as whole-of-life policies, ensuring a lump sum is available upon death to pay off taxes. This can prevent the sale of valuable assets like property, investments, or businesses, which might otherwise be necessary to cover the tax bill. Section 72 policies are offered by Zurich, Irish Life, and Royal London, but they can be expensive, especially if you live a long life. Nick McGowan, founder of Lion.ie, explains that the insurer knows there is a high probability of the policy remaining in force, leading to higher premiums compared to term insurance.
Despite the higher costs, Section 72 policies can be surprisingly good value when compared to the eventual payout. McGowan provides an example of a non-smoking 60-year-old man seeking €500,000 in cover, with monthly premiums of €1,000. Over 25 years, he will pay €300,000 in premiums but receive a €500,000 payout. However, the key is to start these policies at a younger age to benefit from lower premiums.
Section 73 Policies:
These are savings schemes that can be invested and gifted while you are still alive, allowing you to settle a CAT bill or bequeathed upon your death. They are becoming increasingly popular due to rising intergenerational wealth transfer in Ireland. Section 73 policies offer flexibility, as you can choose to keep the funds yourself or use them to offset gift tax. Aviva, for instance, offers multi-asset funds and index funds tracking European and US equities, with a minimum investment of €100 per month.
One of the advantages of Section 73 policies is that they can be cashed in early without losing their tax-free status, provided they meet Revenue approval. This flexibility is appealing to many, as it allows for the use of the funds for other purposes if needed. However, there are requirements, such as a minimum term of eight years and annual premiums not less than 50% of the first year's premiums.
In conclusion, while the tax-free threshold on inheritance has increased, the rising property values have led to a growing number of individuals facing significant inheritance tax bills. Section 72 and Section 73 policies offer effective solutions, but they require careful planning and consideration of the associated costs and benefits. As the trend of intergenerational wealth transfer continues, these strategies will become increasingly important for families looking to protect their assets and minimize tax liabilities.
