Life Policies to Fund Gift or Inheritance Tax

July 19, 2024

A gift or inheritance can result in a significant tax liability and to make matters worse if the assets transferred are illiquid, there may be no funds to pay the tax. The tax liability on a gift or inheritance is payable by the beneficiary which in the case of a gift from a parent to a child, the tax is payable by the child. There are insurance policies which can be taken out to fund the tax payment and are worth considering if there is likely to be a future gift or inheritance tax liability.

What is a Section 72 Life Policy?

This is a type of life insurance policy, the proceeds of which can be used to pay inheritance tax (including Approved Retirement Fund tax).  The policy must be in a form approved by Revenue and annual premiums must be paid by the insured person during their lifetime. Typically a parent would take out the policy and pay the premiums to fund the future inheritance tax liability of his/her children.

The proceeds from the policy which are used to cover the inheritance tax liability are exempt from tax and are not considered when determining the value of the inheritance received.

What is a Section 73 Policy?

A S.73 policy is effectively a savings plan from which the proceeds are used to pay the CAT arising on a future gift.  The owner of the policy (parent) pays into the savings plan for a minimum period of 8 years, after which the funds in the policy can be used to pay the gift tax (payable by the child) on the gift.

This differs from a S.72 policy, which is an insurance policy that covers the inheritance tax arising on the death of an individual.  However, a S.73 policy can also be used to pay inheritance tax arising on the death of the policyholder.

In recent times, these policies have grown in popularity due to more favourable premium rates.  If you would like to know more about S.72/S.73 policies, a member of our team would be happy to discuss the different options available.

This summary is intended as a general guide. No action should be taken without obtaining professional taxation advice. 
 
If you require any advice on the above, please do not hesitate to contact Purcell McQuillan Tax Partners Ltd on 01 668 2700 or email your usual PMQ contact.

Copyright © *2024 Purcell McQuillan Tax Partners Limited, All rights reserved