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Life of Another Policy: Mitigating the Burden of Inheritance Tax in Ireland

Life of Another Policy: Mitigating the Burden of Inheritance Tax in Ireland

 

Inheritance tax, or Capital Acquisitions Tax (CAT) in Ireland, can pose a significant financial burden on beneficiaries, potentially forcing them to liquidate valuable assets to cover tax liabilities. We will explore the impact of inheritance tax through real-world examples and demonstrate how a “life of another” insurance policy and a Section 72 policy can provide crucial financial relief, helping beneficiaries manage or avoid this tax burden.

 

 

The Impact of Inheritance Tax in Ireland

 

Inheritance tax in Ireland is levied on the value of gifts and inheritances received by individuals. The tax-free thresholds vary based on the relationship between the deceased and the beneficiary:

 

  • Group A: €335,000 for children (including adopted children, stepchildren, and certain foster children)
  • Group B: €32,500 for siblings, nieces, nephews, and grandchildren
  • Group C: €16,250 for all other relationships, including non-relatives

 

Any inheritance exceeding these thresholds is taxed at a rate of 33%. Given the high property values in Ireland, particularly in urban areas, these thresholds are often insufficient, resulting in substantial tax liabilities for beneficiaries.

 

 

Case Study 1: The Family Home

The Fanily Home - Life of Another Policy Mitigating the Burden of Inheritance Tax in Ireland

 

Mary inherited her parents’ home in Dublin, valued at €700,000. As an only child and the sole beneficiary, Mary faces a significant tax bill due to the inheritance exceeding the Group A threshold.

 

 

The taxable amount is: €700,000 − €335,000 = €365,000.

The tax liability is: €365,000 × 0.33 = €120,450.

 

Mary, a schoolteacher with a modest income, does not have sufficient savings to cover this tax bill. Consequently, she may be forced to sell the family home, resulting in emotional distress and the loss of her childhood residence.

 

 

Case Study 2: Agricultural Land

Agricultural Land

 

 

John, a farmer in County Cork, inherited agricultural land from his uncle valued at €500,000. Under the Group B threshold, John faces a substantial tax bill.

 

The taxable amount is: €500,000 − €32,500 = €467,500.

The tax liability is: €467,500 × 0.33 = €154,275.

 

 

For John, whose livelihood depends on the farm, this tax bill is crippling. Selling part of the land might jeopardize his farming operations, while taking out a loan to pay the tax could lead to long-term financial strain and potential loss of the farm if he cannot meet the loan repayments.

 

 

Case Study 3: Small Business

Small Business - Life of Another Policy Mitigating the Burden of Inheritance Tax in Ireland

 

Emma inherited her father’s bakery in Galway, valued at €400,000. As the business provides a steady income but not enough to cover a large tax bill, Emma faces a challenge under the Group A threshold.

 

The taxable amount is: €400,000 − €335,000 = €65,000.

The tax liability is: €65,000 × 0.33 = €21,450.

 

While less daunting than the previous examples, this amount still poses a significant challenge for Emma. Raising €21,450 could mean cutting back on staff, reducing inventory, or taking out a loan, potentially hampering the bakery’s operations and profitability.

 

Life of Another Policy: Mitigating the Burden of Inheritance Tax in Ireland

 

 

The Role of Life of Another Insurance Policy

 

 

Life of Another Insurance Policy

A life of Another insurance policy, specifically designed to cover inheritance tax liabilities, can provide a solution to these financial burdens. This policy is taken out by a beneficiary on the life of the person whose death will trigger the inheritance tax liability. The insurance payout, which is tax-free, can be used to cover the tax bill, preventing the need to sell assets or take out loans.

 

Section 72 Insurance Policy

A Section 72 insurance policy is a life insurance policy specifically designed to cover inheritance tax liabilities. The premiums paid on such a policy are not subject to inheritance tax, and the policy proceeds can be used to pay the inheritance tax on the deceased’s estate.

 

 

Benefits of “Life of Another” Insurance Policy

 

  1. Financial Security: Ensures that beneficiaries do not have to liquidate valuable assets or take on debt to pay inheritance taxes.
  2. Emotional Relief: Allows beneficiaries to retain family homes, businesses, or land, preserving their heritage and emotional connection.
  3. Business Continuity: Helps maintain the operations of family-run businesses and farms, preventing disruptions caused by financial strain.
  4. Tax-free Payout: Both “life of another” and Section 72 insurance policies provide payouts that are not subject to inheritance tax, making them efficient means of covering the tax liability.

 

Example: Using Insurance to Avoid Tax Burden

 

Consider the earlier example of Mary, who inherited a home worth €700,000. If her parents had taken out a “life of another” insurance policy with a coverage amount of €120,450, the policy would provide a tax-free payout upon their death. This payout would cover the inheritance tax liability, allowing Mary to retain the family home without financial strain.

 

Similarly, if John’s uncle had taken out a Section 72 insurance policy covering the €154,275 tax liability on the agricultural land, the policy proceeds could be used to pay the tax, ensuring John could continue his farming operations without financial disruption.

 

 

Where to from here

 

Inheritance tax in Ireland can impose substantial financial burdens on beneficiaries, often leading to the sale of cherished assets or the accumulation of debt. However, a “life of another” and Section 72 insurance policies offer viable solutions to mitigate these pressures. By providing tax-free payouts to cover inheritance tax liabilities, these options ensure that beneficiaries can retain family homes, businesses, and land, preserving their financial stability and emotional well-being.

 

As illustrated by the cases of Mary, John, and Emma, these policies can transform potentially devastating tax bills into manageable obligations, safeguarding the future of those affected by inheritance tax.

 

 

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