How to Easily Prepare for Inheritance Tax

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You may, mistakenly, believe that inheritance tax is a rich man’s tax that won’t affect you.

But if your house is worth more than €335,000 your child will have to pay inheritance tax.

And this doesn’t take into account any other assets they may receive on your death – cash, investments, cars, that windfall you received from drunk Uncle Paddy.

So if a €335k gaff makes you rich, welcome to the club, the hostesses will be round with canapes soon.

But let’s go mad and say your total assets are worth a cool million (there’s a bang of musk off you, Elon Musk)

Here’s what his nibs will have to stump up in tax before he can get his hands on any of it.

Look we know it’s an unfair tax.

You pay tax on your assets when you’re alive, then Revenue comes after more tax on the same assets when you die.

But I’m not going to get into the merits of taxation here, I’ll leave that to much more competent people, I am just a humble life insurance broker.

What I will do is outline how you can prepare for the inevitable tax and stop the Taxman from taking a greedy bite out of your children’s inheritance.

Let’s start with the basics…

What is Capital Acquisitions Tax? (CAT)

CAT is not a tax we come across every day so don’t worry if you’re not familiar with it.

CAT can be broken down into two types of tax

1. Gift Tax – This is tax payable while the person giving the gift is alive
2. Inheritance Tax – This is payable after the person giving the gift has died

This article is to help you plan for a future, unavoidable inheritance tax bill.

Death and taxes as the fella says.

Who has to pay inheritance tax?

If you’re a spouse or civil partner taking an inheritance from your deceased spouse or civil partner, you don’t pay inheritance tax.

Everybody else is liable for inheritance tax, your children are most at risk.

How much is inheritance tax?

If the value of the asset you receive is under your threshold (see below), it’s tax-free. Anything above your threshold is taxed at a whopping 33%.

Let’s look at it from the children’s point of view:

You and your sister will inherit assets of €1.5m from your parents. Remember assets comprise anything of value so property, jewellery, cars, savings, investment etc.

Assuming you haven’t received any gifts from your parents in your lifetime, you face an inheritance tax bill of €136,950 each!

And this €136,950 will have to be paid in cash to the Revenue quick smart.

• Should you inherit between January and August, you have to pay by October 31st.
• If you inherit between September and December, you have to pay the inheritance tax bill by 31st August the following year.

If you can’t pay, Revenue charges penalties and interest until you can. The best you can hope for is some sort of deferred arrangement but eventually you will have to pony up almost €140k each.

 

How do I calculate my inheritance tax liability?

The first thing you need to do is to try and estimate what the estate will be worth.

You’re getting the family home worth €750,000.

From this €750,000, you subtract your “threshold” (tax-free amount)

Check this table for your threshold:

Group A
A son or daughter of the person giving the gift or inheritance (the disponer). Including certain foster children or a minor child of a deceased child of the disponer. Parents also fall within this threshold where they take an absolute inheritance from a child.

Group B
A parent (in respect of a gift or a limited interest), brother, sister, niece, nephew, grandparent, grandchild, lineal ancestor or a lineal descendant of the disponer.

Group C
People with a relationship to the disponer not already covered in Groups A or B.

You’re a daughter of the deceased and this is your first inheritance so you get €335,000 tax-free leaving a taxable inheritance of €415,000

You must pay 33% inheritance tax on the €415,000.

Do you have €136,950 hiding down the back of the sofa?

If you don’t, you may have to sell the family home, settle the inheritance tax bill and then make do with whatever cash remains.

Wouldn’t it be a whole lot easier if your parents had a life insurance policy that would pay out €136,950 allowing you to take the full €750,000 tax-free?

What if I received a previous inheritance?

Using the example above, imagine you received a previous inheritance of €100,000 from your parents. This would reduce your threshold from €335,000 to €235,000 giving a taxable inheritance of €515,000 and an inheritance tax bill of €169,950

Once you have used up your full threshold, you’re hit with a 33% bill on all further inheritances from that group.

What should a parent do to prepare for inheritance tax?

If the parents are married or civil partners, they can receive assets from their spouse tax-free.

Inheritance tax will become an issue on the death of the second parent.

• death of a first parent – assets pass to the surviving spouse (tax free)
• death of that spouse – assets pass to the children (taxable)

Therefore the parents should take about a Section 72 Inheritance Tax Life Insurance policy that pays out on the death of the surviving spouse.

More on this later.

Any inheritance tax exemptions or reliefs that I can use to reduce my tax bill?

There are 4 reliefs you can use to lower your inheritance tax liability:

Business / Agricultural Relief

This relief operates by reducing the market value of ‘agricultural or business property’ * by 90%. Revenue levies inheritance tax on an amount that is substantially less than the market value.

Tax Exemption for Dwelling House

You will be exempt from CAT on the inheritance of a dwelling house if:

1. the house was the only or main home of the person who died (this condition does not apply if you are a dependent relative)
2. you lived in the house as your only or main home for the three years immediately before the date of the inheritance
3. you do not own or have an interest in another house
4. you do not acquire an interest in any other house from the same disponer between the date of the inheritance and the valuation date
5. the house continues to be your only or main home for six years after the date of the inheritance.

This does not apply if you:

are over 65 at the date of the inheritance
or
are required by reason of employment to live elsewhere
or
are required to live elsewhere because of your physical or mental infirmity and this is certified by a doctor.

Favourite Niece/Nephew

When this relief applies, a niece nephew can be treated as a child and get the higher threshold of €335,000. See here for conditions.

Annual Gift Exemption:

You may receive a gift up to the value of €3,000 from any person in any calendar year without having to pay Capital Acquisitions Tax (CAT). This means that you may take a gift from several people in the same calendar year and the first €3,000 from each disponer is exempt from CAT.

How can you use Life Insurance to Pay Inheritance Tax?

Ok, so now you know how inheritance tax works, how can you use Life Insurance to plan for an inheritance tax bill?

You do so using a special Revenue approved policy called Section 72.

What’s a Section 72 Life Assurance policy?

Please see here for FAQ on S72 insurance

This was previously known as a Section 60 policy.

A S72 life assurance policy is a Revenue approved life insurance policy. The payout on a S72 policy is tax-free if you use it to pay an inheritance tax liability.

In other words, money flows through the policy tax-free to pay an inheritance tax bill.

This policy allows you to plan for an inheritance tax liability so that on your death, this policy will pay your children’s inheritance tax bill.

Your children will receive their full inheritance tax-free.

Can I use a normal life insurance policy to pay inheritance tax?

Yes, but as the proceeds of a standard life insurance will form part of your taxable estate, it doesn’t make sense to do so.

How should I set up inheritance tax life insurance?

Firstly, you have to estimate the amount of inheritance tax you will need to cover. This is an inexact science as there are three variables you have no control over:

1. the market value of your assets,
2. the tax-free thresholds
3. the 33% inheritance tax rate

The best you can give is an educated guess.

Scroll down and I can help you figure this out.

You then buy a policy a S72 Life Policy that will pay out that amount on your death.

Married couples or civil partners can set up a joint life second death policy. On the first death, the surviving spouse will receive all the assets tax-free.

On the second death, the assets will pass to the kids causing an inheritance tax liability. The S72 policy will pay this liability giving your children a tax-free inheritance.

Are there any conditions that must be met for a valid policy?

Yes, as follows:

• It must be a Revnue approved S72 policy (all the policies we offer here at Lion.ie are Revenue approved)
• The maximum age to apply is 74
• The regular premiums must be paid by the insured but see below. ?

Can a child take out a policy on their parent’s life?

Yes, this is common where the parents cannot afford the life insurance premiums. It’s only fair the children pay the premiums as they will get the benefit of a tax-free inheritance.

The child will pay the premiums and therefore will be the owner of the policy. As the owner of the policy, the child will receive the proceeds tax-free to pay the inheritance tax.

You will have to prove to the insurance company that there is a financial need for such as policy as normally a child cannot insure the life of a parent. This can be done by showing a copy of the will to the insurance company.

Alternatively, the child or children can gift €3000 per year tax-free to their parent’s bank account to pay the S72 direct debit.

Is Section 72 Life Insurance Expensive?

S72 Life Assurance is a Whole Of Life policy so the insurer is on the hook for a payout assuming you keep paying the premiums. Unlike a term life policy, there is no chance of you outliving a whole of life plan. For this reason, whole of life cover is mere expensive than term life insurance.

However, when you buy a whole of life cover, you are buying a long term asset that has value as it will payout eventually.

And you can make this even more valuable if you add the Life Changes Option to your plan.

In brief, this gives you additional options on your S72 plan:

Let’s look at some numbers for Simon, an engineer, who recently took out €100,000 S72 Cover.

Simon will pay the guts of €1200 per year from his savings to pay for this asset.

The maximum Simon will pay is €72,000 (premiums stop at age 100 – we can dream of living that long!). If he does so, the minimum this policy will payout is €100,000.

From the table below, let’s imagine Simon gets to age 70 and his children are financially independent and can well afford to pay their own inheritance tax bill.

After 30 years, he will have paid €35,924 for an asset that is worth €48,876 (should he choose to lock in the protected cover – when he dies, the policy will pay out €48,876).

Alternatively, he can sell the asset back to the insurer by cashing it in for €25,147 and treat himself to around a world trip.

Over to you…

That’s a pretty comprehensive look at how you can use S72 Life Assurance to pay an inheritance tax bill.

In my experience, there are two types of people in the world.

1. Those who say to hell with it when they’re dead, the kids can look after themselves (if this is you, good luck to you, we’re not a good fit but that’s ok!)
2. Those who are feel it is their duty to help their kids pay their inheritance tax bill but want to do so in the most affordable way possible (if this is you, I’d love to help)

Here’s a nifty calculator where you can estimate the potential inheritance tax liability.

If you’d like advice on how to prepare for not-so-rich man’s tax, I’d love to help.

You can schedule a call here

Talk soon!

Nick 05793 20836 / nick @  lion dot ie