Is there a nobler financial aspiration than the desire to help your family? Most people with the good fortune to have surplus money want to pass something to the next generation. Perhaps you want to help your child to buy a home, help your niece to start a new business or help your grandchild to go to college?
What you may not realise is that the state provides several specially targeted tax reliefs to help you to pass on your estate tax-efficiently. These reliefs are strangely underutilised even though, in some cases, they provide an automatic 50% uplift on your money.
Here is a list of five common inheritance planning tax reliefs (there are many more):
- Gift Tax exemptions allow you to gift €3,000 annually tax-free to anyone – this can accumulate to a €320,000 tax-free gift after 30 years from a couple to a child or grandchild.
- Section 73 relief allows you to gift unlimited proceeds from a special savings plan tax-free.
- Section 72 relief allows you to bequeath unlimited proceeds from a special life policy tax-free.
- Section 785 relief allows you to claim tax relief on premiums to a special life insurance policy.
- Exit Tax relief allows your beneficiaries to avoid all the lifetime tax on the income and growth in a special investment fund that they inherit from you.
Let me provide more detail on just one of the reliefs above.
SECTION 73 INVESTMENT PLANS
The Capital Acquisitions Tax (CAT) liability on gifts and inheritances has increased significantly in recent years. This is due to increased CAT rates, reduced CAT thresholds, the closure of CAT loopholes and an increase in the value of financial, property and business assets.
For many people, the most tax-efficient structure to fund the CAT liability is a section 73 plan/policy for gifts. The tax relief provided on these plans is greatly underappreciated and effectively provides a 50% uplift in the value of the proceeds of the plan.
- These plans were introduced in section 73 of the Capital Acquisition Tax Consolidation Act 2003.
- They are specially designed to provide a lump-sum in the event of a taxable gift from a disponer to a beneficiary in their lifetime.
- The proceeds of the policy fund the CAT liability for the beneficiary of the gift and are tax-free in the hands of the beneficiaries to the extent that they are used to pay CAT arising from a gift.
- For the tax relief to be valid, the policy must be in place for eight years before the gift takes place and the tax arises.
- The policy must be expressly effected under section 73 of the Act for the purposes of paying CAT under the Act. In practice, this means that the life company must add a clause or endorsement to the policy at commencement to note that it is being arranged for this purpose.
- Premiums must be paid by the disponer/lives assured and not the beneficiaries.
- The policies are normally set up in trust to the designated beneficiaries.
- It is normal, but not mandatory, for the trust document attached to the policy to list the proposed beneficiaries and their proportionate share of the proceeds.
- Where this is not done, the disponers can determine how the proceeds should be distributed.
- Where the proceeds of the section 73 policy exceed the actual CAT liability arising on the gift, the surplus proceeds are still payable to the beneficiary, but they are subject to CAT in the normal way.
- It is typical for a couple with children to set up this type of policy on a joint-life, second-death basis so that the policy can continue to be funded by the surviving spouse until maturity.
- They can also be set up on a single-life basis.
Section 73 – PRACTICALITIES
- Section 73 Investment Plans are regular investment plans that accumulate a lump-sum in an investment fund.
- There is typically no life insurance involved even though they may be structured legally as life policies.
- The policy can invest with a variety of fund managers in equity, property, bond or cash funds.
- Payments into the fund must be made on a regular monthly, quarterly or annual basis – they cannot be made in a lump-sum.
- If tax rates or family circumstances change, the donor can change their mind before the gift is made and keep the policy proceeds.
Section 73 – SUITABILITY & CASE STUDIES
- These policies are particularly suitable in a situation where a parent has lent money to a child and wishes to forgive the loan.
- Let’s assume that a parent has lent a child €900,000 to buy a house and the child has already used up their lifetime CAT allowance.
- If the parent were to forgive that loan, a CAT bill of c. €300,000 (33% of €900,000) would normally arise.
- To fund the €300,000 CAT bill for the child, the parent would ordinarily have to gift that child an additional €450,000 because that gift would itself be liable to CAT @ 33%.
- To achieve the same result tax-efficiently, a section 73 policy is set up for c. €2,750 per month to accumulate €300,000 after 8 years (total cost is c. €265,000 over 8 years).
- The parent then forgives the loan of €900,000.
- This enables the parent to pass the €300,000 proceeds of the section 73 to the child tax-free to fund the €300,000 CAT bill arising on the forgiveness of the loan.
- The family benefit from tax relief of €150,000, and, in effect, the investment of €265,000 becomes worth €450,000.
For further information, please contact your advisor or a member of the team at 01 441 9900 or firstname.lastname@example.org
This note is for general guidance purposes only. The treatment of the policies in a specific situation can only be confirmed by a tax advisor. Clinch Wealth Management Ltd is not a tax advisor and does not accept any liability for decisions made on the basis of this note. All the information provided in this document was correct at the time of publication.