News

Capital Acquisitions Tax (CAT) is an umbrella term for the tax that is payable on a gift a person receives from someone while they are alive or an inheritance they receive after someone dies. There are various thresholds below which no tax is payable, depending on the relationship between the donor and recipient. However, if someone is conscious that they may be causing a tax liability for a beneficiary there are a couple of ways of offsetting it using an insurance policy.

The simplest of these is sometimes referred to as a Section 72 policy, or inheritance tax plan. For example, if your estate is worth €600,000 and you want to leave it to your only son or daughter after you die, assuming they have not received any previous gifts from you the first €335,000 is tax-free, so the inheritance tax payable would be 33% of the remaining €265,000, or €87,450.

If you don’t want your child to have to pay that amount of tax you can effect a life insurance policy to pay out this amount when you die. Under normal circumstances a life insurance plan would be included in the estate valuation; thereby, causing a greater tax liability. However, if the plan is set up as a Section 72 plan, this relief means that once the proceeds of the plan are used to pay the inheritance tax, the plan does not add to the value of the estate. Please note, you cannot use an existing policy you may have. A plan would have to be set up specifically as a Section 72 policy at outset.

Obviously, this type of plan is only suitable for inheritance rather than gift tax. If you want to offset tax on a gift you are giving while you are alive this would be known as a Section 73 plan. Rather than a policy that pays out on death, this would be a regular premium savings plan. Unlike a Section 72 plan, the Section 73 plan would need to be in place for at least 8 years before the gift is given.

For instance, if you want to pass a rental property worth €600,000 to your child while you are still alive, but are happy to wait at least 8 years to do so. The figures here are the same as the scenario above, so there would be a gift tax liability of €87,450. A Section 73 savings plan could be set up to target being worth this amount after the 8 years and as long as the money is used to pay the gift tax it does not constitute a further gift.

Under both Section 72 and 73 the donor is the person who pays the premiums on the policy. They can both also be set up on a joint-life basis if you are married or civil partners.

It would be beneficial to consult with a financial advisor if you feel any of these scenarios apply to you or your family, and they will guide you through the process.

Sean Sweeney, QFA RPA is a Qualified Financial Advisor and Retirement Planning Advisor. You can contact him through John F. Loughrey Financial Services by telephone on 074-9124002 or by email on sean@jfl.ie