In my experience, it is usually only once someone has fully entered their ‘Next Chapter’ (retirement!) do they start to think about how best to manage their estate, and what kind of legacy they might leave to loved ones. Prior to the Next Chapter, the focus is rightly on building enough to ensure a comfortable and sustainable lifestyle for themselves.

Section 72 inheritance tax policies are often discussed as a tool to manage inheritance tax liabilities and to maximise the legacy they leave to loved-ones. So this week I’ll dig into;

• What do these policies entail? 
• What are their potential advantages and potential drawbacks?
• What are the costs/potential savings to be had from employing a Section 72?
• What if you saved the premium instead??

I look at it all for you.

What are Section 72 Inheritance Tax Policies?

Section 72 policies are life insurance policies specifically designed to cover inheritance tax liabilities. When you pass away, the payout from a Section 72 policy is used to pay the inheritance tax due on your estate, potentially preventing your beneficiaries from having to sell assets to cover these costs. These policies are recognised and approved by Revenue under Section 72 of the Capital Acquisitions Tax Consolidation Act 2003.

The Formal Background of Section 72 schemes in Ireland?

According to Revenue;

Section 72 provides that the proceeds of a “qualifying insurance policy” taken out by
the insured person expressly to pay inheritance tax and approved retirement fund (ARF)
tax due by his or her successors are exempt from CAT, provided certain conditions
are met.

The policy proceeds are not taken into account for aggregation purposes (calculation of CAT liability).
A “qualifying insurance policy” is one:

1. That is in a form approved by Revenue,
2. In respect of which annual premiums have been paid by the insured person during his or her lifetime, and
3. That is specifically taken out under section 72 to pay “relevant tax” (i.e. Inheritance tax due and payable in respect of a bequest made by the insured person)

The relief applies to the following:

Single- life policies
The insured takes out a life policy under section 72 and bequeaths the proceeds of the policy to his or her executors on trust or to a named successor to pay “relevant tax” arising on his or her death. The insured person may provide for payment of the proceeds on the death of the insured person to a named beneficiary contingent on a specified event; for example, the policy may specify that the proceeds will go to the named beneficiary provided he or she survives the insured person by a specified time period but if this condition is not met then the proceeds will go to another named individual. (which makes sense in case the beneficiary dies before the person passing the estate!)

Joint-lives policies
Spouses or civil partners may take out a joint-life policy under section 72 under which annual premiums are paid by either or both of them during their joint lives and by the surviving spouse/civil partner following the death of one, and which provides for the payment of the proceeds on the death of the
second individual. Also known as Joint Life Second Death 🙂

This latter individual is treated as the insured person and is deemed to have provided all of the proceeds which can then be bequeathed as part of his or her estate. The proceeds of a section 72 policy must be taken on or after the death of the insured person and not later than one year after the death.

A person holding a life interest may take out a section 72 policy in his or her sole name for the benefit of another person on the expiry of that life interest and the proceeds of the policy may be used to pay inheritance tax arising on that event.

If you have a child or other person with a life interest, they could pay for your Section 72 Policy, if they wanted to. For example, you gift them the Small Gift Exemption (€3k from you each per year), and they use that to pay the policy, potentially!

If you wanna get into the weeds on Section 72 (and Section 73) policies here in Ireland – check out the Revenue’s Tax & Duty Manual on CAT here.

Section 72 Policies; Costs and Potential Pay-Off?

Lets imagine a scenario; you are 50 years of age, you have moved into the next chapter, and are living the dream! One concern you have is that inheritance tax, while a long way off, will likely consume a large % of your legacy. Based on the calculations of your professional Financial Planner :), you’ll likely die with an estate of at least €6m (Property, ARF, Investments).

This is based on 3% inflation rate, 6% assumed growth rate before fees and spending in line with your lifestyle goals. You’ll have already gifted lifetime allowance to your 3 kids, so they will inherit the €6m fully taxable. They each inherit €2m and owe 33% tax on that, so a total tax on your legacy of €2m!

You have options and choice as to what to do about the potentially high CAT bill your beneficiaries will have to pay;

• Does it make sense to gift more now, and in the years prior to death?
• Make a tax efficient Will?
• Set up Family Partnership or Trust?
• Give some to the proverbial dog’s home?
• Section 72 Policy?

There are options available to you.

If you decide on a Section 72 Policy, based on your age (50yrs) and amount of cover you want to take out (€2m), and assuming good health with no health issues, the cost per month right now will be c€2,600 per month, €31,200 per year.

If you live till 90, you’ll have paid €1.24m to the insurance company for the cover. And provided you keep the plan in place and pay the premia, it will pay out €2m, which would fully go towards covering the projected €2m CAT bill. Your kids will each get and be able to keep the projected €2m inheritance each. Your estate ‘wins’ by c€750k. Not a bad outcome?

If you live to 70, you’ll have paid ‘only’ €624,000, and the policy would pay out €2m, you’re estate potentially ‘wins’ by €1.3m give or take?

What If You Saved The Premia Instead??

We’re stepping into the territory of Section 73 (instead of Section 72) policies now, but bear with me for a second.

Just as an experiment, what if instead of paying the above insurance monthly/annual premium, you saved the premium each month and invested it smartly, say for example in global equity! For simplicity and for easy comparison, we’ll assume you save in a Capital Gains Tax structure here, where tax is only due on disposal, which we’ll assume is on your death, as we did with above Section 72. And note there is no CGT payable on assets that are passed on death.

If you saved €31,200 per year for 40 years, and you got 6% growth per year (conservative to say the least!) your ‘savings plan’ here would be worth €5.1m!!! €1.24m of that was your contribution (as above insurance example) but a whopping €3.87m of the €5.1m was from growth/gains!

‘Ahhh, but’, you might say, ‘there will be CAT payable on that policy before it gets to the kids’. Yes of course, in that scenario there will be CAT due on that savings plan. But assuming that the premium of €31,200 came from regular income that was already factored into the original calculation which resulted in the projected €6m estate value at end of life, the estate value has now, thanks to the growth from the savings plan, increased by €3.87m, to a future estate value of €9.87m!?

So yes, the total CAT bill on your estate is now €3.25m (9.87m * 33%) instead of the previous €2m (6m*33%). But, if we take our focus away from what the tax bill will be, and instead focus on what the kids will actually get out of it all (which is arguably where the focus should be – because tax rates and thresholds will change folks!)

• Original Scenario of doing nothing = €4m reaches the kids post tax
• Section 72 Scenario = €6m reaches the kids post tax
• Save & invest the premium Scenario = €6m reaches the kids post tax

So based on pure numbers here, the save & invest or Section 72 routes are closely tied in that scenario?

And we could also look at the additional layer of having that savings plan set up as a Section 73 policy (watch this space!) where the final value, if used to pay a CAT bill and met other criteria, would not be factored into the CAT calculation. Would that therefore likely throw the result in favour of the Save & Invest route? Potentially.

There are tonnes of variables; CAT thresholds, your own wishes, your own liquidity, your own longevity, your beneficiaries, interest rates, inflation rates, CAT tax rates, CGT rates, Exit Tax rates, future legislation changes, your own biases and concerns. The list goes on.

Increased Cost If Starting Later!?

If you delayed the setting-up of the policy until you were 70 (to try save money!), you’d pay €6,808 per month today – or nearly €82k per year (assuming no health issues). If you then survived to 90, you’d have paid €1.6m in premia for the €2m pay-out. Again – no harm knowing this!

My View on the Pros of Section 72 Policies

1. Tax Efficiency

The primary benefit of a Section 72 policy is its tax efficiency. The proceeds from the policy are used specifically to pay inheritance taxes, ensuring that your beneficiaries might receive the full value of your estate without the burden of having the generate cash to pay what may be a significant CAT tax bill.

2. Peace of Mind

Knowing that your beneficiaries won’t have to sell off assets (such as a family home) or dip into their own pockets to cover inheritance tax provides considerable peace of mind. This assurance can make retirement planning more straightforward and less stressful in certain scenarios

3. Preservation of Estate

By covering the tax liabilities, Section 72 policies can help preserve the integrity of your estate, and you can rest easy knowing that Revenue will not tax you even further! Depending on the situation, it might enable your loved ones can keep treasured family homes, heirlooms, or investments intact, rather than having to liquidate them to meet tax obligations. If this is important to you, that’s a big benefit.

4. Flexibility

These policies offer some flexibility in how they are structured and paid for. You can choose a policy that suits your financial situation and adjust as needed over time, making it easier to integrate into your broader financial plan if cost is an issue. Check out lion.ie article about ‘Life Changes’ options within Section 72 policies, where one can get back 70% of the premiums paid in certain scenarios, even if no death!

Cons of Section 72 Policies

1. Cost

One of the significant drawbacks of Section 72 policies is the cost! They are not cheap! Premiums can be extremely high relative to other type of Life Cover. This is especially so for older individuals taking out the policy, or those with pre-existing health conditions. If you are over 74 you can’t get a Section 72 policy currently, so get it before then if you want one! This expense needs to be weighed against the potential tax savings and the overall size of your estate.

2. Complexity

Understanding the intricacies of Section 72 inheritance tax policies can be complex. They require careful consideration and planning, often necessitating professional advice to ensure they are set up correctly and align with your overall estate planning goals.

3. Commitment

These policies represent a long-term financial commitment. If your circumstances change, such as your health or financial situation, maintaining the policy can become a burden. Additionally, if you decide to cancel the policy, you may not get back what you paid in premiums.

4. Regulatory Changes

Tax laws and regulations can change. While Section 72 policies are beneficial under current legislation, future changes could impact their effectiveness. It’s crucial to stay informed about any legislative changes that might affect your estate planning.

5. Correct Amount Of Cover?

Once could easily pay for a level of cover that is excessive and/or will never be utilised for CAT purposes – a lot of money down the drain, and potentially just more cash for Revenue to tax!?

Final Thoughts

Section 72 inheritance tax policies offer a strategic way to manage inheritance tax liabilities, providing peace of mind and preserving your estate for your beneficiaries. However, they come with costs and complexities that require careful consideration. 

I firmly believe that they are other ways that can and should be explored as part of figuring out the legacy/inheritance piece:

• Tax efficient Wills?
• Family Partnership or Trusts?
• Gifting to beneficiaries while you are alive and can see them enjoy it?
• Donations to causes you are drawn to?
• Section 73?
• Spending and enjoying it all yourself!?

Like a lot of things in life, there are many ways to approach it, and often people will choose a balanced approach across several of the above.

If you do think Section 72 is for you, then engaging with a decent financial advisor or insurance broker to understand how these policies fit into your overall retirement and estate planning strategy is essential. And make sure to be clear on what is in it for them to sell you one – and don’t accept the ‘Oh don’t worry, the insurance company covers our fee’ response, get a number!

By weighing the pros and cons, we have a good chance of making an informed decision that best suits our (and our beneficiaries!!) legacy goals within our preferences. I wish you good luck with it.

Paddy Delaney QFA RPA APA

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Disclaimer

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The content of this site including blogs and podcasts is for information purposes only. Everybody’s financial situation is different and the content we share on our site and through podcasts may not be applicable to you. 

The articles, blogs and podcasts are not investment advice. They do not take account of your individual circumstances, including your knowledge and experience and attitude to risk. Informed Decisions can’t be held responsible for the consequences if you pursue a course of action based on the information we share