About Section 72
What is Section 72 insurance?
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 if used to pay an inheritance tax bill. A Section 72 policy allows people to plan for the payment of inheritance tax in Ireland efficiently and in advance.
For a correct Section 72 policy, Whole of Life means just that… it will pay out on your death no matter what age you are when it happens.
Section 72 cover allows people to avoid incurring potentially life changing and usually unexpected tax demands upon inheritance of a property or asset. Under Irish law, it is the beneficiaries of the estate who are liable to pay the taxes, not the disponer (the person giving the gift).
There are only three life assurance companies in Ireland that offer true Section 72 policies – Irish Life, Royal London (formerly Caledonian Life) and Zurich. We deal with all of them.
Unfortunately, many people who would benefit from taking out a Section 72 life insurance policy, are not even aware of its existence.
Efficient Tax Planning.
Perhaps you’ve heard of a friend or relative, who upon death of a parent or relative has inherited a property, only to be issued with a hefty Capital Acquisitions Tax (CAT) bill. Everything that you leave in your will is subject to a valuation and subsequent tax (unless specific estate planning has been implemented prior to death).
Often children who inherit a property are forced to sell the property just to cover the inheritance tax bill in Ireland. This can cause as many emotional issues as it can financial – having to sell the family home for instance. If you inherit any money or assets from January to August, you must pay your CAT bill by October 31st of that year. If you inherit from September to December, the tax must be paid by 31st August of the following year.
How a Section 72 policy works
Let’s say you’re a parent who owns a property with a value of €500,000. Eventually, your child will inherit this property from you. When the ownership of the property passes over to your child (the beneficiary), anything over the individual threshold of €335,000 is liable to Capital Gains Tax (CGT) at a current rate of 33%.
Minus the €335,000 individual threshold (see further details of the thresholds here), that leaves €165,000 taxable at 33%. The beneficiary of the inheritance, in this case your child, is left with a staggering tax bill of €54,450. And that is just taking the family home into account. All assets – cash etc., are included in the valuation of your estate.
There are different inheritance thresholds depending on the relationship between the disponer and the beneficiary, which make a massive difference to the amount of CGT payable.
To summarise –
Group A – From parent to child – €335k allowance
Group B – A parent, brother, sister, niece, nephew, grandparent, grandchild, lineal ancestor or a lineal descendant of the disponer – €32,500 allowance
Group C – People with a relationship to the disponer not already covered in Groups A or B – €16,250 allowance.
Effective Estate Planning.
Now, with a Section 72 whole of life insurance policy, the expected tax bill would have been calculated beforehand, for the €54,450 figure. On your death, the proceeds of this plan will cover the tax bill, allowing your child to inherit the property tax-free.
In this instance, the much loved family home would be safe and remain in the ownership of the family.
A Section 72 insurance policy covers the potential CGT your loved ones may incur. Like all life policies, a number of factors are taken into account when determining the monthly premiums, such as health status, age & the value of the pay out (sum assured).
Section 72 Examples.
For some in depth examples, take a look here.
If the valuation of your estate is €1,000,000 for tax valuation purposes, and you have a Section 72 policy that is set to pay out €150k on your death, the valuation of your estate remains at €1,000,000 as your policy has been set up very specifically as a Section 72 policy, meaning the proceeds of the policy escape the clutches of CAT.
Requirements for setting up a Section 72 insurance policy
The policy holder must be the person leaving the inheritance. Although some providers allow the children to pay the premiums, as they are set to benefit.
As a child cannot normally insure the life of a parent, they will have to prove to the insurer that there is need for a Section 72 policy. This is easily done, by showing a copy of the will or proof of assets.
The maximum age at entry for effecting a policy is 74. You need to organise this before your 75th birthday. This is important.
In situations where estates pass over from one spouse to another, or between civil partners, a joint policy is recommended, so upon the second spousal death, the beneficiaries of the inheritance will be covered by the Section 72 policy. This is known as joint life, second death. No inheritance taxes are payable on the transfer of assets from one spouse to another following death. It is on the death of the second spouse and the passing of assets at that stage where inheritance taxes become payable.
Why do people take out Section 72 insurance?
Section 72 Insurance is a tax efficient insurance policy.
To put it simply, it saves a lot of money and potential headaches. Imagine your children having to sell the family home, at short notice, just to settle a tax bill. Section 72 insurance cover negates the need for this.
A Section 72 insurance policy moves your money from a taxed environment, to a CAT free environment.
It is a massive benefit to those set to receive a large inheritance. A smart and easy way to plan for your beneficiaries’ future, by taking a few simple steps in the present .
Parents take out the policy with their children in mind. Children in their thirties and up, take out whole of life insurance policy on their parents, with their own future in mind.
With ever-fluctuating house prices, it’s becoming a more common part of sensible financial & estate planning.