Navigating Inheritance Tax in Ireland: Section 72 & 73

Ireland’s Capital Acquisition rate, currently pegged at 33%, is among the highest worldwide. This has compelled many individuals inheriting assets, including property, to either sell their inherited family homes or resort to mortgages to settle their Inheritance Tax dues.

The Shrinking Tax-Free Thresholds

Over recent years, the tax-free thresholds have witnessed significant reductions. To illustrate, in 2009, a child could inherit up to €542,544 from a parent without any tax implications. Fast forward to today, and this threshold has been reduced to €335,000.

Tax-Free Thresholds by Relationship:

• Group A: €335,000 (Child)

• Group B: €32,500 (Lineal ancestor/descendant, sibling, or child of a sibling)

• Group C: €16,250 (All other relations not by blood)

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Imagine a scenario where Mr. O’Brien passes away, leaving behind an estate worth €500,000. If his daughter inherits the estate, she falls under Group A and can receive €335,000 tax-free, with the remaining amount subject to the Capital Acquisition rate. 

If Mr. O’Brien’s nephew inherits, he falls under Group B, allowing him a tax-free inheritance of €32,500. Lastly, if a distant relative or a friend inherits, they fall under Group C, receiving only €16,250 tax-free.It’s worth noting that an annual gift exemption of €3,000 is still in place. Additionally, all benefits received post 05/12/1991 are considered.

Section 72 Life Insurance Plan: A Solution

If your offspring are burdened with an inheritance tax upon your demise, the Section 72 Whole of Life Insurance plan can come to their rescue. Consider this scenario: your children inherit your assets, and even after leveraging available reliefs and exemptions, there’s an outstanding inheritance tax liability of €250,000. By having a Section 72 Life Assurance policy, upon your passing, €250,000 would be disbursed to your children. This amount can then be utilised to clear the inheritance tax liability.

For the Section 72 Life Cover, it’s essential to understand that the proceeds must be used to settle the inheritance tax on the benefits acquired from the deceased’s estate within a year of their passing. If the insured passes away within eight years, it’s treated as a standard life insurance plan.

Regarding the Revenue Regulations for Section 72, the policy must adhere to Section 72 provisions. The insured individual should be the one paying the premium to qualify for Section 72 relief. Typically, the life cover should be at least eight times the annual premium value. Only married couples or registered civil partners can opt for a joint life plan. Premiums should be consistently paid for a minimum of eight years. Discontinuation of premiums post the eight-year mark means no resumption. Furthermore, premium fluctuations shouldn’t exceed 50% within any continuous eight-year span unless prompted by a review from the life insurance company.

Section 73 Savings Plan: Addressing Gift Tax

Gift tax becomes applicable when someone, like a son or daughter, receives assets subject to Capital Acquisition Tax (at 33%) due to reasons other than a parent’s death. The Section 73 Savings Plan allows parents to save for a minimum of eight years. The savings can then be used to offset some or all of the gift tax arising from asset transfers to their children.

For the Section 73 Savings Plan, the policy must be in line with Section 73 provisions. The policyholder should be the one paying the premium to qualify for Section 73 relief. Only married couples or registered civil partners can initiate a joint life plan. Premiums should be paid consistently for at least eight years. Premium discontinuation, even post the eight-year mark, means no resumption. Moreover, premium adjustments shouldn’t exceed 50% within any continuous eight-year span. After eight years, the plan’s proceeds, when used to pay gift tax within a year of encashing the plan, will be exempt from gift tax.

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