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…
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
This article is to help you plan for a future, unavoidable inheritance tax bill.
Death and taxes as the fella says.
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.
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.
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.
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:
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.
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.
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?
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.
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.
Therefore the parents should take about a Section 72 Inheritance Tax Life Insurance policy that pays out on the death of the surviving spouse.
There are 4 reliefs you can use to lower your inheritance tax liability:
You will be exempt from CAT on the inheritance of a dwelling house if:
This does not apply if you:
are over 65 at the date of the inheritance
are required by reason of employment to live elsewhere
are required to live elsewhere because of your physical or mental infirmity and this is certified by a doctor.
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.
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.
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.
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.
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.
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:
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.
Yes, as follows:
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.
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.
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.
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
Nick 05793 20836 / nick @ lion dot ie
057 93 20836
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