How can I reduce or avoid inheritance tax?
Inheritance Tax
Nobody likes paying tax but Inheritance Tax in particular is a tax that really annoys a lot of people. It’s a contentious tax and is often used to garnish votes at election times by politicians promising to abolish or raise the tax threshold on the tax. The tax can be viewed as a tax on the wealthy and a good way to redistribute wealth in society. The other side of the argument is that most people’s wealth is built up over a life time and has already been taxed by way of income tax and capital gains tax. It’s no surprise people get vexed at the thought of one third of their estate going into the state coffers when they pass away.
Inheritance Tax Rates 2018
Inheritance Tax is currently at a rate of 33%. There are tax free transfers allowed up to certain limits depending on your relationship to the person (see table below).
Threshold Relationship
€310,000 Child, or, minor child of a deceased child
€32,500 Brother, sister, child of a brother or sister, lineal ancestor or descendant.
€16,250 Other
It’s not all bad news as there are a number of reliefs given to business owners and farmers. There are also Section 72 policies which are Life Assurance contracts, the proceeds of which can be used to settle an inheritance tax bill in the event of your death. The tax saving is that the proceeds of the policy don’t form part of your estate and don’t incur a tax liability.
With any Life Insurance contract it will need to be underwritten and if you have a medical condition there could be an increased charge that might make the cover too expensive. The age you take out the cover will also have a bearing on the cost, the older you are when you take out the Life cover the more expensive it will be.
Ideally you should take out a Section 72 policy in your fifties and early sixties. If you are a married couple taking out the policy it will be set up on a joint life / last survivor basis. This means that the pay-out will be on the death of the second person, as that is when the tax becomes payable by the person inheriting the estate. There is no Inheritance Tax on the passing of an asset between a husband and a wife.
Section 72 Example:
John & Mary
Both aged 60
Non – smokers
In Good Health and accepted at ordinary rates for Life Cover.
They have two children.
Section 72 Life Cover Amount €250,000 (Joint Life/ Last Survivor)
Premium €471.23 per month (Irish Life 14/8/2018 )
It’s important to consider the ongoing cost of the cover in detail. If you are employed when taking out the policy, the premium may not be an issue but you need to consider the impact of paying the premium for many years into retirement.
They next thing you should do is work out the break-even point. When will you have paid in more money than the Life Insurance contract will pay out. In John & Mary’s example, €471.23 per month equates to €5,654.76 per annum. Divide the Life Insurance amount of €250,000 by the annual premium of €5,654.76 = 44.2 years. They are currently aged sixty, so they will be 104 before they have paid in more money that the proceeds of the plan. Even if that were the case and they were lucky enough to live to age 104, there is still a tax savings for their children who will be inheriting their estate.
On the face of it Section 72 structures make a lot of sense. For most people they represent good value but you need to make sure that you have the means of paying the premium in retirement. This could be a 30 or 40 year financial commitment!
If you find the premium to be a struggle in future years you could always get your children to contribute towards the premium. Given that they are likely to be the main beneficiary of the policies it’s not necessarily a big ask. They will be allowed gift you up to €3,000 per annum without any tax implications (small gift allowance)
This article is not intended to replace professional advice. If you would like more information about Section 72 policies, we would be happy to answer any questions. info@pensionplan.ie