How does a Section 72 policy work in practice?
Now that you have a better idea of what section 72 insurance is, take a look at these scenarios to see the costs with cover and without cover.
Anything that you leave forms part of your estate and has a value – not just property. Art, shares, cash, bonds, cars, jewellery etc. Even a benefit paid by another life assurance policy. The only policy type to be exempt is a Section 72 policy.
First off, it’s important to have a look at what the inheritance tax thresholds are. The threshold is the amount of money that a person can inherit or receive as a gift, throughout their lifetime, before CAT becomes payable. The thresholds vary in amounts, depending on the relationship of the person receiving the money to the person giving the money.
Current Capital Acquisitions Tax (CAT) thresholds:
**Correct as of Budget 2020.
|Group A: €335,000||Group B: €32,500||Group C: €16,250|
|Son or daughter of person giving the gift or inheritance.||Brother, sister, niece, nephew or lineal ancestor and descendants.||Applies in all other cases not covered by group A or B.|
The following are a couple of examples of some very typical situations. Scenarios A & B show the tax liabilities WITHOUT any Section 72 policy in place. Scenarios C & D show just how much a Section 72 policy can help your beneficiaries.
|Scenario A:||Scenario B:|
|Value of inheritance:||€900,000||Value of inheritance:||€200,000|
|Beneficiaries:||2 children||Beneficiaries:||1 niece|
|Combined CAT threshold:||€670,000 (€335k X 2)||Combined CAT threshold:||€32,500|
|Amount taxable at 33%:||€230,000||Amount taxable at 33%:||€167,500|
|Total CAT due:||€75,900||Total CAT due:||€55,275|
|Individual liability:||€37,850 per child||Individual liability:||€55,275|
|Scenario C:||Scenario D:|
|Value of inheritance:||€600,000||Value of inheritance:||€300,000|
|Beneficiaries:||1 Daughter||Beneficiaries:||2 Grandchildren|
|Combined CAT threshold:||€335,000||Combined CAT threshold:||€65,000|
|Amount taxable at 33%:||€265,000||Amount taxable at 33%:||€235,000|
|Total CGT due:||€87,450||Total CGT due:||€77,550|
|Amount of Section 72 cover:||€90,000||Amount of Section 72 cover:||€80,000|
|Individual tax due:||€0||Individual tax due:||€0|
In Scenarios C & D, the Section 72 insurance policy proceeds are used to pay any Capital Gains Tax due. Any excess benefit left over from the policy will be taxed at 33%, with the balance going to your nominated beneficiary.
There is an obvious huge financial benefit to your beneficiary here, but it’s not just the financial benefit – It is the ease with which it can be paid – In a time when so many people’s main asset is their home and they may have limited cash to leave to their beneficiaries, the home would have to be sold to pay the tax if the beneficiaries did not have access to cash themselves.
If you have any questions regarding your estate planning or if you have any inheritance tax queries, please contact us here