Despite how it sounds, Section 72 isn’t actually the name of a military base deep in America where aliens are being investigated.
I mean it could be.
CIA, don’t come for me.
Let’s try that again.
In the context of Life Insurance: Section 72 ISN’T the name of a secret military base where aliens are being investigated.
Instead, Section 72 is a type of Life Insurance policy you can take out in Ireland to pay off Capital Acquisition Tax. Also known as CAT. Also known as ‘meow’.
Also known, more commonly, as inheritance tax.
Inheritance tax is the bogeyman of tax. It’s also fecking ridiculous. So let’s start by talking about that CAT.
Let’s say you own a house. When you die, you want to leave it to your kids. Maybe you’re planning on bequeathing it to only one of them because the others are already minted. That’s fine. I’m not here to judge.
Either way, a house is being bestowed to a child.
You die. It’s okay: you live to be 97 and pass away quietly in your sleep beside your lifelong partner. Both of you are oblivious and go out dreaming about peaceful, lovely things.
Good innings, etcetera etcetera.
You leave the house to your child.
Your child is then hit with a 33 per cent tax bill that they’ll need to pay to Revenue pretty sharply. If they decide not to pay it (or more likely, if they can’t), they’ll be hit with penalties and interest.
Certain factors (thresholds, if they’ve already gotten gifts from you, the number of beneficiaries) come into play for the final tax bill, but let’s look at an example.
You want to leave your favourite child a house worth €500,000. They’re the sole beneficiary, and both you and your partner die.
They’d have to pay €54,450 in tax. (You can check out the maths on Zurich Life’s handy calculator, and run the sums for any potential inheritances you’re planning for your kids.)
That’s quite the wedge to have to hand over. And yes, we can all agree it’s an affront that inheritance tax exists.
We meet at dawn tomorrow to riot in the streets.
Should the riot fail, Section 72 Life Insurance could come in really handy.
Section 72 Life Insurance is a type of Life Insurance that parents buy in Ireland to pay their children’s inheritance tax bill. It’s called S72 because it’s defined in Section 72 of the Capital Acquisitions Tax Consolidation Act 2003.
It works much the same as regular Life Insurance in that you take out a policy, you pay your premium, and when you die, your benefactor gets a tax-free lump sum. In this case, they’ll use it to clear the inheritance tax.
Benefactors. Inheritance tax. We’ve gone a bit notiony here.
Next thing you know, we’re all going to be doing the big shop in Donnybrook Fair and paying €27 for a sandalwood candle.
The caveat here is that Section 72 insurance has to be taken out on the person leaving the inheritance.
It’s a bit like taking a hit out on yourself, except to insurers, and not, you know, the mafia. You also have to pay the premiums.
All of this is to say that your kid, i.e. the benefactor, can’t take a Section 72 policy on your behalf.
They can gift you up to €3000 tax-free using the small gift exemption.
You can then use this gift to pay the premiums on your policy. The beneficiaries will be getting the benefits of the policy so it’s only fair they pay for it or at least contribute.
It’s pretty straightforward and comes down to how much inheritance tax will be owed.
If you calculate that your assets will result in an inheritance tax bill of €100,000 for your kids, then that’s the amount of cover you’ll need. When you die, the insurer will payout and, in turn, your estate can pay the inheritance tax bill so your child can inherit the estate tax-free.
Yes, this does mean that you’re going to have to pay for this insurance – which likely means paying to hand over a house you already spent 35 years paying off a mortgage on.
Like any Life Insurance plan, the amount you pay for your policy varies from person to person. No two people are the same, so no two policies are the same.
Generally, the significant factors affecting the cost include your age; if you smoke or not; if you have any health issues; and the amount of cover you need.
When it comes to your age, there’s not much you can do about that. You’re as old as you are. If you’re a smoker, consider quitting – and applying in a year or so. Smoking DRAMATICALLY increases the cost of your cover, so it’s definitely worth it.
Plus, smoking is outright bad for you, so it’s as good a reason as any to bin the cigs.
If you have a health issue, unfortunately, your application might be a bit more complicated. Say it’s a mild, manageable condition, you might get away without having to pay more. However, if it’s a more severe condition, you will likely have to pay more. Again, it’s not fair, but there’s not a whole lot we can do about it.
(Whisper it: the revolution begins at dawn.)
The amount of cover is straightforward: the bigger the inheritance you have to cover, the more insurance you need = the higher the premium.
You can go to all three insurers independently yourself, or you can ask a friendly neighbourhood insurance broker to do it for you.
Me. I mean me.
Yes, using the small gift exemption I mentioned above ?
Yes there is, it’s 74.
As in, if you’re currently 75 or more, you’ve missed the boat I’m sorry to say.
As there’s a bit more maths and tinkering involved in calculating the amount of inheritance tax and the cover to suit, we can’t give you an instant quote online.
We can give you a S72 insurance quote, though.
Just fill in this short questionnaire or give me a call on 057 93 20836.
If you’d like to know about inheritance tax (and how to avoid it) before taking the plunge, you can head over here to read my blog about it.
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