Insure your loved ones against inheritance tax bill - at a price

I have only one daughter, and her father is deceased. The family home is worth circa €670k and my apartment in Wexford, circa €200k. Where does that leave my daughter tax-wise? Would it work out better if I put her name jointly on both properties? Or selling the property in Wexford to pay off the inheritance tax so she can live in family home?

Ms A.P.

The query last week about a daughter who would not be able to inherit the family home because of the tax bill that would come with it has drawn a lot of reaction from parents, like you, who find themselves in a similar position.

The good thing here is that you are planning well in advance, as your daughter is still in college and you are a young woman yourself.

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I will come to the specifics of your query in a moment, but certainly one option for people who have reasonable income and substantial assets is to take out what is called a Section 72 insurance policy, so named because it is a policy that meets the terms laid down in section 72 of the Capital Acquisitions Tax Consolidated Act 2003.

Reader Ms S.M., among others, has upbraided me for not mentioning these policies in this week’s piece... and they’re right. It is something we covered a few years ago and they are certainly not for everyone, but they can be very useful.

The key thing here is that the person who must take out the policy is not the beneficiary, but the person leaving the estate

Essentially, a section 72 policy is a life policy that can be used to meet the tax bill associated with an inheritance. But, as you might expect, there are very specific rules associated with them.

First, the person taking out the policy must be over the age of 18 and, likely more relevant, under the age of 75 when they first take out the policy. In your case it would be single life, but for many families it would be joint life, second death – ie, the last parent – as assets transferring between spouses are not subject to inheritance tax anyway. And as it is whole-of-life at a fixed price – without the regular premium reviews in other life policies – premiums are higher from the outset.

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The amount covered must be at least eight times the annual premium in general: where a policy has a premium loading for medical, health or occupational reasons, the sum assured must be at least six times the premium.

The key thing here is that the person who must take out the policy is not the beneficiary, but the person leaving the estate. And this is where you can see why it is relevant only to people who are wealthy in income terms.

Figures from Royal London make the point. We looked at the cost of covering a tax bill of €500,000; that means we are considering an estate where the value exceeds any relevant tax-free thresholds by €1.5 million... so readers can adjust the figure to match their personal circumstances.

For a couple aged 64 and 60, who are both relatively healthy with no illness or conditions, Royal London says they could expect to pay about €907.35 a month. That assumes neither smoke and that their alcohol consumption is within normal guideline levels, with no history of alcohol abuse.

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When you consider these policies pay on the second death and the average life expectancy of a woman in Ireland now is 84 years of age, or possibly a little more, you can get some sense of how expensive these things are.

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Assuming the woman is the younger, and both live to their expected ages, they will pay premiums on the policy of more than €260,000 to avoid leaving their children a €500,000 bill.

And if you have pre-existing medical conditions, the cost will inevitably be higher.

If you have the money, fair enough. The payout will still exceed the premium cost, but it is a heavy financial burden on ageing parents alongside other living costs on likely reduced income in retirement – just to ensure their children have what are very substantial inheritances.

And remember also, that the surviving spouse or partner will be stuck with the bill when their other half dies. If they cannot make the payments, the policy falls and there will be no cover for the inheritance tax bill, regardless of premiums paid to date.

If all goes well and the policy payment covers the tax bill, good. If it falls short perhaps because of rising asset values, beneficiaries will have to pay any balance of tax due. More importantly, if the policy payout exceeds the tax bill, the excess in itself becomes a taxable inheritance for the beneficiaries.

If her name goes on both properties, you will actually trigger a tax liability for her now, while she is still in college, with even less prospect of being able to meet the bill

As I understand, only three providers in Ireland offer section 72 whole-of-life policies – Royal London, Irish Life and Zurich. The upper limit on what they will cover differs, with Royal London, I gather, covering substantially more is asset value than the other two.

Ultimately, this is a niche product, and irrelevant unless you are going to be leaving more than €335,000 to one or more sons or daughters – most likely substantially more.

Is a section 72 policy the right option for you? I doubt it, to be honest.

You have your own family home, currently worth €670,000, and the apartment down the country worth another €200,000. No doubt there would be other bits and bobs in the estate, but they at least are more liquid.

Barring bad luck, inheriting from you will not be an issue for your daughter for many years, and values will almost certainly have risen by then, but the tax free threshold might also rise, so we’ll just set that aside for the moment and deal with it on the basis of current values.

Putting either or both properties into joint names does not really get around the issue, as it will still be seen as a transfer, or gift. She will be deemed to have received a gift worth €335,000 or €435,000, depending on whether you put just the family home or both properties into her name alongside yours.

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As you can see from the figures, at best she will have fully used up her tax-free threshold – and will be required to notify Revenue even if no tax is due as she has crossed a line drawn at 80 per cent of the threshold, after which Revenue must be alerted that you are closing in on the limit. If her name goes on both properties, you will actually trigger a tax liability for her now, while she is still in college, with even less prospect of being able to meet the bill.

Your second suggestion makes much more sense, and also explains why you might not choose to go down the section 72 policy route.

Section 72s serve only two purposes. First, for the wealthy looking to pass that wealth unencumbered by tax to their children, and second for those of moderately more modest means who do not want to leave a child in the position of having to liquidate a family home because they have no other way of meeting a tax bill.

Your prime aim is that your daughter has the family home when you die. So you do not want her to have to sell what is an illiquid asset to meet any inheritance tax bill. Of course, she may qualify tax-free under the dwelling house exemption that we mentioned last week as long as she owns no other property and is living in the home with you for three years before you die, but let’s assume she doesn’t for one reason or another.

She is unlikely to need your help through a section 72 policy to meet her tax and you can thus save yourself significant sums in the premiums due on such a policy

The two properties are worth €870,000 and her tax-free threshold is €335,000, so the excess that will be taxed is €535,000. At the current rate of capital acquisitions tax – 33 per cent – her tax bill will be €176,550.

Selling the Wexford property at €200,000 would release that sum or more after selling costs. If you sold that property, you would also face capital gains tax, but any capital gains liability would be written down to zero on your death, so it should not be an issue for her.

And before anyone mentions it, yes, her bill will be higher because there are likely other assets – jewellery etc – or cash savings that she might receive, but these can be sold off to meet the tax bill owing on them.

So she is unlikely to need your help through a section 72 policy to meet her tax and you can thus save yourself significant sums involved in the premiums due on such a policy.

Another reader has mentioned the issues of trusts. They have their uses, but they are not straightforward and have their own tax issues. It is something I will return to at a later date, along with another gem – section 73 policies.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice