Inheritance Tax

Capital Acquisitions Tax, otherwise known as inheritance tax, was introduced in Ireland in 1975 as a tax on those who inherit property or other assets. The total amount of inheritance tax paid in Ireland in 2019 was €522 million, which by way of contrast was 75% higher than 2007, at the height of the Celtic Tiger.

This issue has taken on more and more relevance in recent years, as property values and other asset values have increased. The current threshold for children receiving inheritance from parents (Group A) is €335,000 per child. This threshold was set at £150,000 in 1975, in what was a very different Ireland in terms of household wealth. This is cumulative – each person is entitled to one threshold per group for all inheritances and gifts received since 5th December 1991. Any inheritance above this amount is taxed at 33%. There is no inheritance tax due on the transfer of assets between spouses.

It should be noted that for unmarried couples co-habiting, the threshold in Group C would apply.

The issue of inheritance tax planning is now an integral part of the financial planning process. Broadly speaking, parents have two main options:

1. Take the view that the tax liability can be paid for by the children, from whatever means they have available at the time of the inheritance. In some cases, this may lead to the sale of assets at inopportune times, or the disposal of the family home.
2. Plan for the inheritance tax liability by quantifying and solving the problem. It may be unpalatable for some to think that one third of their estate, and life’s work, will be paid over to the Revenue. Particularly when much of this wealth may have already been taxed already (Income Tax, Property Tax, Capital Gains Tax, etc.)

When looking at solutions, this is where a Section 72 life insurance policy comes to the fore. This is a whole of life policy, which is set up under trust for the beneficiaries. The proceeds of the policy are free from inheritance tax on the condition that they are specifically used to pay inheritance tax. The premiums are fixed, and are not subject to review, giving certainty in terms of the cost.

It is also possible to pay premiums on this type of policy for 15 years, and then stop paying the premiums and opt for;

1. a locked in level of cover, with no further premiums due, or
2. encashment of the policy, and a refund of up to 70% of the premiums paid.

These types of policies are more suitable than traditional Section 72 policies due to these features above.

When looking at how much Section 72 cover is required, this would be linked to the estimated inheritance tax that will be due. It is also possible to take into account the income tax liability that may become due where a child over 21 inherits an Approved Retirement Fund (ARF) from a parent. These proceeds are currently taxed at 30%.

When looking at a cost/benefit analysis, the cost of putting this cover in place very often pales in comparison to the anticipated inheritance tax liability.

If we consider a couple aged 45, both non-smokers, with a potential inheritance to their children of €1,000,000 and a potential inheritance tax bill of €330,000 to the children.

If the parents put in place a Section 72 policy, the indicative cost for this would be €283.47 per month. After 20 years, if they opt to cancel the policy and receive back 70% of the premiums paid, this would equate to a refund of €47,623 (versus total premiums paid of €68,032). In effect, the net cost for this policy has been just €85.04 per month.

If they kept the policy until age 82 (average Irish life expectancy) they would have paid in €125,860 in premiums – still far less than the sum assured of €330,000 which is what the policy would pay out on death.

It is also possible to insure a portion of the liability – you do not have to insure the full liability.

Even someone with a relatively modest level of assets should consider this as a long term savings product and vehicle for estate planning. By starting this type of policy when you are young, the premiums are cheaper, offering better value over the life of the policy.

If you would like to discuss this further, and how it intersects with your overall financial planning, please contact me at rossdevlin@biograph.ie and I would be delighted to assist you.