Simplifying Section 72: Paying Less Tax on Inherited Policies 

15 Mar, 2024
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Simplifying Section 72: Paying Less Tax on Inherited Policies 

When managing your money, understanding taxes is an important element of Estate Planning. One area that can help you transfer your  family assets by paying less tax when you pass away, is called a Section 72 Life Assurance Policy

 

This plan will provide a cash payment when you die which your family can use to pay any tax bills that might result. The proceeds of this life insurance policy are exempt from inheritance tax, however, it must be used to pay the inheritance tax bills that arise at that time.

 

Purpose of Section 72

Section 72 policy is a Revenue-approved insurance policy designed to cover the costs of an inheritance tax bill. It is a useful tool that ensures that the proceeds of your life insurance policy help or reduce any inheritance tax bill your family may face after your death.

They are tax-efficient solutions ,  making it easier for families to stay financially stable during tough times which can save them making difficult financial decisions.

 

Practical Examples and Case Studies 

Mr and Mrs O’Brien have 2 children and assets of 1 million to be passed on in the event of their death. The kids currently have an inheritance tax threshold or limit of €335,000 each which  they can receive in a lifetime from their parents.    

Estate Value (Assets): €1,000,000 

Less the combined threshold of (€335,000 x2): €670,000 

This means there is a balance which is subject to Tax of 33%: €330,000 

The children will have inheritance tax liability of €108,900 to pay. 

A Section 72 policy can be put in place for an amount of 108,900 to cover this tax bill on the event of the parent’s death so that all of the inheritance will pass to the children without an inheritance tax liability being paid.

 

Imagine John inherits a tax bill from his dad after he passes away. With Section 72, the policy will transfer to John’s name to help pay the inheritance bill. This ensures that the money from the policy helps reduce John’s tax bill.

 

Now, picture a whole family with a bunch of these policies. If they use Section 72 wisely, moving policies between family members strategically, they can save a lot on taxes over time, keeping more money for the future.

 

Criteria for Qualification 

To make sure a policy qualifies under Section 72, it usually needs to be a certain type of life policy approved by the Revenue Commissioners either as a single-life policy  or a joint-or a joint-lives policy.

 

A “qualifying insurance policy” is where the policyholder has paid annual premiums over the course of his or her lifetime and the policy was taken out specifically for the purpose of paying “relevant tax” (i.e. inheritance).

 

There must be at least 8 times the annual premiums of life cover for the plan to qualify for inheritance tax relief (section 72 relief), and if the plan is also going to qualify for gift tax relief (section 73 relief), where there is a unit-linked savings element.

 

SINGLE LIFE POLICY 

A life policy taken under section 72 is transferred to a beneficiary on trust or a named heir to pay “relevant tax” in the event of the insured’s death. Depending on the event specified in the policy, for example, the policy may specify that the payout will go to the named beneficiary provided he or she survives the insured person by a specified time period but if this condition is not met then the proceeds will be directed to another named individual.

 

JOINT-LIVES POLICIES 

Joint-life policies are for spouses or civil partners under section 72. When one person dies, the proceeds are paid to the surviving spouse/civil partner. The premiums are paid by either or both of them during their joint lives and by the surviving spouse/civil partner after one individual’s death.  Alternatively, spouses or civil partners may obtain a joint policy so that inheritance tax is not payable on the death of one spouse/civil partner or on the death of the surviving spouse/civil partner within 31 days of the other’s death.

 

Consequences of Non-Compliance 

Without a Section 72 policy, you could end up with a bigger tax bill. Not following the rules might trigger something called Capital Acquisitions Tax. To avoid this, it’s crucial to pay attention to the details and that’s where we can help.  In a nutshell, Section 72 is a handy way for you to pay less inheritance tax. Understanding what it’s all about, looking at real-life examples, and sticking to the rules can help families make the most of it. Having a Section 72 policy can ensure a smooth and tax-friendly transfer to loved ones.

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