Have you thought about how inheritance tax could impact the assets you pass on to your loved ones? With the Group A Capital Acquisitions Tax (CAT) threshold now at €400,000 per child, many families in Ireland are finding that a significant portion of their estate may still be taxed at 33%.
Thankfully, with effective inheritance tax planning in Ireland, you can reduce or even eliminate this burden entirely for your family. Two options worth considering are Section 72 and Section 73 life insurance policies. The lesser-known Small Gift Exemption can also be highly effective when used strategically.
In this article, we break down what these options are, how they work, and how you can use them to secure your legacy.
What Is a Section 72 Policy?
A Section 72 life insurance policy is designed to help your children or other beneficiaries pay the inheritance tax due on your estate when you pass away. This policy pays out a lump sum tax-free, and does not in and of itself, add to the inheritance tax calculation to the extent that it is used towards paying an inheritance tax bill.
Key Benefits:
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Specifically designed for inheritance tax liabilities.
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The payout is exempt from CAT when used for that purpose.
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Prevents beneficiaries from having to sell property or other assets to pay the tax.
Example:
John, an Irish business owner, leaves an estate worth €2 million to his two children. Each inherits €1 million. After applying the €400,000 threshold, they face a CAT bill of over €198,000 each. Thankfully, John had a Section 72 policy for in place for €400k which his children used to pay their inheritance tax liability, allowing them to keep their full inheritance intact.
What Is a Section 73 Policy?
A Section 73 life insurance policy is used to cover the gift tax on significant gifts made during your lifetime. If you plan to gift money or assets to your children or grandchildren while you’re alive, this policy can ensure the tax doesn’t reduce the value of what they receive.
Key Features:
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Must be held for at least 8 years to qualify.
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Payout is tax-free if used to cover gift tax.
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Ideal for those transferring wealth during their lifetime.
Example:
Mary wants to gift €500,000 to her daughter Emma to help with a house purchase, meaning a Capital Acquisition Tax (CAT). The gift incurs CAT of approx. €33k (assuming no previous material gifts to Emma from her parents), but Mary has a Section 73 policy in place which has grown in value to €50,000 after 8 years of maintaining the policy. The proceeds of the Section 73 savings plan can used to pay the gift tax, without further increasing the deemed gift to Emma for CAT calculation purposes.
Use the €3,000 Small Gift Exemption
Don’t overlook one of the simplest tax planning tools available: the Small Gift Exemption. You can gift up to €3,000 per person each year, completely tax-free. This exemption is separate from the lifetime tax-free thresholds and can be a powerful way to transfer wealth gradually.
How it works:
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You can give €3,000 annually to each child, grandchild, or any other person.
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If both parents gift €3,000 each, a child can receive €6,000 per year tax-free.
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Over 10 years, that’s €30,000 per parent, or €60,000 per couple per child. Assuming a 7% per annum average investment growth rate over a 10 year period, the value of the €60,000 total outlay over the 10 year period would be €86,542*, without ever impacting the child’s €400,000 Threshold ‘A’ allowance. *Past performance is not a guide to future returns. Projections do not factor in tax payable on any gains over the 10 year period.
Section 72 vs Section 73: Which One Do You Need?
| Section 72 | Section 73 | |
|---|---|---|
| Covering inheritance tax when you die | ✅ | ❌ |
| Covering gift tax on lifetime transfers | ❌ | ✅ |
| Owned and paid for by you | ✅ | ✅ |
| Tax-free if used to settle CAT | ✅ | ✅ |
| Policy length requirement | No minimum | 8 years minimum |
If your estate includes assets like property, investments, or business shares, inheritance tax can significantly reduce what your loved ones receive. These policies:
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Help protect the value of your estate.
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Provide liquidity to cover tax bills without selling assets.
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Offer peace of mind for both you and your beneficiaries.
Seek Professional Advice
For inheritance tax planning in Ireland to work effectively, your life cover must be structured and maintained correctly. At Chartered Capital, we specialise in helping clients put the right plans in place, tailored to their family’s needs, goals, and timelines.
We can help you:
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Assess potential CAT liabilities.
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Understand how Section 72 and 73 can work for you.
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Use the Small Gift Exemption as part of your long-term estate plan.
Inheritance and gift taxes can create financial strain for your loved ones, but with smart planning, they don’t have to. A Section 72 or Section 73 life cover policy, combined with annual tax-free gifting, can be an effective way to reduce tax and protect your family’s future.
Need guidance? Contact the Chartered Capital team today for a confidential conversation about your estate planning options.
Warning: Chartered Capital are not tax advisors, however we are more than happy to meet with you and your accountant to help identify a best course of action to help reduce future gift and inheritance tax liabilities for you and your family.
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