Section 72 life cover is a type of policy designed for those who may be leaving substantial inheritances to (in the main) children on their death. Large inheritances can lead to issues for the beneficiaries as they may be left with sizeable Capital Acquisitions Tax (CAT) liabilities as a result. In some cases, they may have to sell the property inherited just to pay the tax due.

 

Currently the tax-free threshold for children is €310,000. Anything above this amount is taxed at 33%. So, for example, if a person left a child a total inheritance worth €1,000,000 the child would have to pay tax of €227,700 on it (i.e. €1,000,000 less €310,000 is €690,000. €690,000 @ 33% is €227,700). This could create quite a few problems for the child and may result in unwanted property sales or potentially having to borrow money if it is not a cash inheritance.

 

To avoid these potential problems, the donor could take out a life cover policy on themselves where the proceeds are specifically used to pay the tax bill. In this case, no tax will be paid on the proceeds of the policy used to pay the CAT bill. So using the example above, the donor could take out a Section 72 whole of life policy for €227,700 and on his/her death the beneficiary will pay no inheritance tax.

 

This type of policy does not apply to everyone for obvious reasons but if you plan on leaving substantial assets (for example, physical properties, cash, shares, land etc.) to your loved ones (outside of your spouse) then it’s definitely something I would recommend discussing with a financial advisor.

 

Gerard Ward

13th June 2017