Formally known as Section 60 Insurance in Ireland, Section 72 insurance is a Revenue-approved, whole of life policy, the proceeds of which are tax-free when used to pay for an inheritance tax bill.
Section 72 policy gives individuals the opportunity to plan for the payment of inheritance tax in Ireland efficiently and in advance.
In simple words, for a correct Section 72 policy, Whole of Life means – this insurance policy will pay out on your death, no matter when it happens or at what age you’re. It allows people to avoid incurring potentially life-changing and usually unexpected tax demands upon the inheritance of a property or asset.
As per Irish Law, it is the liability of the beneficiaries of the estate to bear the taxes, not the disponer.
A 33% is due on the value of your assets if you leave them to someone other than your spouse or civil partners. Your home, investments, and pensions are examples of assets.
What Is The Solution?
Inheritance tax may be wholly or partially eased by a whole of life insurance policy. To save a beneficiary from the exposure of inheritance tax bills, the policy needs to be configured as a Section 72 Life Insurance policy.
The Revenue Commissioners have specified their approval of this particular type of insurance policy under Section 72 policy of the Capital Acquisition Tax Consolidation Act 2023.
The properties and the assets that you leave behind will not need to be refinanced or even sold to pay an inheritance tax bill if the right amount of insurance under the Section 72 policy is in place.
The coverage amount selected will depend on:
- The valuation of the assets for which may be subject to inheritance tax.
- The beneficiaries of the asset.
- The amount of inheritance tax that would be due.
- What could be afforded in terms of monthly premium amounts?
You should remember that the Section 72 policy can be expensive and the donor bears the premiums. However, simple strategies can be structured and put into place where beneficiaries can assist with costs by gifting the donor (the bearer of the premiums) and utilising small gift exemptions.
The right level of coverage under a Section 72 policy can prevent beneficiaries from having to sell a portion of their inheritance or from having to take out a loan to fulfil their inheritance tax obligations.
This is a tax-efficient alternative.
When you pass away, this policy gives you a lump payment that your loved ones can use to cover any inheritance taxes. As long as it is used for that purpose, the payment from a Section 72 policy is exempt from inheritance tax.
Prior to the commencement of your policy, you must choose to have it set up as a Section 72 Life Insurance policy. It won’t be eligible for a Section 72 status later on.
It is understandable that as time passes, the value of your assets and any inheritance tax liabilities can vary. But after you pass away, your entire cover amount will still be dispersed. The full sum is still compensated even if the insurance coverage on your policy at the time is higher than the inheritance tax due. The additional sum might therefore be provisional to inheritance tax on the excess.
Constructing A Section 72 Policy
There are several ways to set up a Section 72 policy:
- To solely protect your own life (single life cover). Your policy is bestowed after your passing.
- To provide joint life, and second death coverage for you and your civil partner, spouse, or former spouse. In this case, the insurance only pays out after the passing of both the insured parties. Thus, the premiums must be continued even after the passing away of the first individual because there will be no payoff.
- You must designate someone as the “trustee” of your policy. A trust is a legally binding arrangement which enables you to designate trustees who will oversee the dispersing of the funds to the specified beneficiaries after your passing. MMA advisors will assist you in completing a Section 72 trust alongside your application.
Does Revenue Have Any Related Conditions?
Revenue does have some requirements and conditions that you must be aware of as Section 72 policies are essentially deployed to ease Capital Acquisition Tax (CAT) dues:
- The coverage amount must be a minimum of eight times the policy’s annual premium amount.
- Payments must be made continuously, on time, and for a minimum period of eight years.
- Even after the completion of eight years, you cannot resume monthly payments if you stop making them.
- Joint life cover is only acquirable where the second party insured is either a spouse or civil partner.
- If your payments are doubled or halved in any eight-year period, your policy may no longer be eligible for a Section 72 relief.
Did The Revenue Department Provide Any Recommendations?
The Revenue department suggests that you either:
- Place your policy in trust; or
- Prepare a will that states that the proceeds of the policy are to be used to pay inheritance tax for beneficiaries. This will make sure that your beneficiaries receive the tax relief offered under Section 72 of the Life Insurance Policy.
Examples Of Application Of A Section 72 Policy
Upon your passing, your child may inherit a family home worth €750,000 alongside additional assets worth €50,000. This leads to the total amount of €153,450 inheritance tax bill.
If your child doesn’t have access to such an amount, they will be required to sell the property. But you can help them avoid such situations with a Section 72 Life Insurance policy.
If you pay premiums for a Section 72 policy to cover an expected inheritance tax bill of €153,450, your child will be able to inherit your property and other possessions upon your passing, and the proceeds of the Section 72 policy would go to the Revenue to cover for the inheritance tax due.
Final Thoughts
A Section 72 policy can be of great advantage if you do it at the right time. Unfortunately, not many people are aware of its existence. Section 72 policy should only be constructed under the guidance of a financial broker who possesses expertise in this area. Feel free to discuss Section 72 policy with expert advisors and take into account other details beyond the scope of this write-up.
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Read Also- How To Plan Easily For Your Inheritance Tax In Ireland?
