Using life insurance to beat inheritance tax

If you stand to inherit property or assets from parents but are worried about getting caught in the current inheritance tax ‘trap’, a life insurance policy might be an effective way to avoid paying the full whack.

Over the last few years, the Government has reduced the tax-free threshold for capital acquisitions tax (CAT) to €225,000 for people who stand to inherit assets when their parents die.

So if a deceased husband and wife willed their family home worth €1,000,000 to their three children, then (and as long as they had not been living there) they would each be facing an inheritance tax bill of €35,725 on the last death of either spouse, according to Michael Bradley of Clear Financial.

“This begs the question, where do the children find the funds to pay this tax bill?” he said. “Sadly, for most, they may have no choice but to sell the family home or delve into any family savings or investments that have been willed onto them.”

However, there is a simpler and more cost-effective solution, which is to take out a Section 72 life insurance policy that will pay the tax bill for them.

“This life assurance benefit does not form part of the estate asset value, as it is specifically written under section 72 of the Taxes Consolidation Act 1997 to pay inheritance tax,” he said.

The policy could be taken out by the parents themselves, but the children, if they are in employment, could finance the policy for their parents given that its really for their benefit, said Mr Bradley.

A joint-life, second-death policy for a 55-year-old male and 53-year-old female, both non-smokers, would cost €103 a month.
“Assuming this couple lived to the maximum expected life expectancy for their age, which is actuarially calculated to be 40.9 years for both lives, they will have paid a total of €50,763 in premiums over the period.

“This is less than half of what they would have had to pay out in inheritance tax.”

This, he said, would be a safer investment than investing €103 a month into a PRSA plan over the same 41-year term.

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