The use of life assurance protection policies to fund Inheritance Tax with the benefit of Section 72 relief is well known. However, the potential to use a life assurance savings plan to fund Gift Tax with the benefit of Section 73 relief is less well known or used. It can be a useful option, particularly for those who can’t get Section 72 life assurance cover.
When an individual gifts assets to a beneficiary, other than a spouse or civil partner, the gift eats into the beneficiary’s available CAT Threshold amount. When the lifetime Threshold is used up, a Gift Tax liability of 33% will arise, the same as Inheritance Tax, for the recipient of the gift.
However, gifting assets, rather than holding onto them until death, has two potential advantages:
- Assets are transferred earlier and can be utilised earlier. Say a couple aged 60 with a 30-year old son. If they plan to leave assets to their son after both of them have died, on average this won’t happen for another 34 years. Their son could therefore be well in his 60’s before inheriting.
- Any further growth in value of assets after transfer falls outside the CAT regime. If assets are expected to grow steadily in value, the sooner they are transferred to the next generation the better, from a CAT planning point of view.
If a life assurance savings plan is put in place to provide for the ‘relevant’ tax, Revenue will not charge Capital Acquisitions Tax (CAT) on the plan proceeds if the money is actually used to pay gift tax.
The benefit of using a ‘qualifying’ life assurance savings plan to fund for the payment of gift tax is that, as long as certain conditions are met, the proceeds of the plan when used to pay your beneficiaries gift tax bill, will not increase your gift tax liability.
Whereas, if your client gives their beneficiaries additional money to pay the gift tax bill from their deposit account, this will be seen by Revenue as an additional gift, and will increase the beneficiaries’ tax bill.
|Bank Account Proceeds||‘Special’ Section 73 Plan|
|Left to pay tax||€67,000||€100,000|
|* If this plan is used to pay the relevant gift tax arising on the gift being made, gift tax will not be payable on the plan proceeds.|
How the Section 73 relief from gift tax works in practice:
|John and Mary are married. Their estate is valued at €1,000,000. John owns a rental property company valued at €500,000 which he has decided to gift to their son Paul in 8 years time.|
|Tax free threshold||€310,000 (assuming no previous gifts/inheritances received)|
|Taxable at 33%||€62,700 or nearly 13% of the value of the gift taken in tax.|
|Therefore, when John gifts the property company to Paul, he will lose up to 13% of the value of the gift as he will have to pay €62,700 in gift tax.
To fund for this tax, John could affect a Section 73 savings plan, which would pay out €62,700 in 8 years time. This is then used to clear Paul’s gift tax bill. If John had given Paul the €62,700 from his bank account, this would have increased Paul’d gift tax bill.
When can the savings plan be used to pay Gift Tax for a beneficiary?
The plan must be going for at least 8 years and have paid at least 8 annual premiums, before it can be drawn on to pay Gift Tax arising on a gift made by the policyholder. The annual premiums must be broadly level.
Who owns the Section 73 savings plan?
The person leaving the gift is the proposer / plan owner and owns the Section 73 savings plan.
Who pays the premium on the Section 73 savings plan?
The person giving the gift must pay the premium on the plan.
Can I use an existing savings contract as a Section 73 savings plan?
No, an existing contract cannot be switched to a Section 73 plan. The plan must be specifically endorsed as a Section 73 contract at date of commencement.
Can both Section 73 and Section 72 relief be availed of under the one plan?
For the proceeds of a policy to be eligible for both reliefs the contract would need to have both a life cover element AND a savings element. To qualify for relief from inheritance tax (section 72 relief) the plan must have life cover of at least 8 times the annual premium, and if the plan is ALSO to qualify for relief from gift tax (section 73 relief) there must be a unit linked savings element to the plan. So, if there is no savings element on a protection plan it will not qualify for relief from gift tax (section 73 relief). And if there is not the minimum amount of life cover on a savings plan it will not qualify for relief from inheritance tax (section 72 relief).
What happens if I die during the lifetime of the Section 73 savings plan before the gift is made?
If you die before the end of the minimum 8-year period, the cash value of the plan will not qualify for relief in the payment of either gift tax or inheritance tax. Indeed if the owner died after the 8 years, and had not used the funds to pay gift tax before death, the value of the plan would not be exempt from inheritance tax.
Must the plan proceeds be used to pay Gift Tax?
No. A savings plan, expressively effected under S73 CAT Act 2003, does not oblige the policyholder to make a gift or use the plan proceeds to pay Gift Tax at any time in the future. It is simply an option after 8 years, assuming annual premiums have been paid for at least 8 years.
Could the plan be used to pay a number of different Gift Tax liabilities over time?
Yes. To comply with the requirement that the gift giving rise to the Gift Tax must be made within one year after the plan is drawn on, withdrawals from the plan should therefore be staggered to occur no more than one year before each anticipated gift.
What happens if there is an excess amount on the Section 73 plan?
Any excess over the gift tax liability that is not used to pay gift tax remains with the plan owner as it is their money.
Will exit tax be deducted on the Section 73 plan?
Yes, it is still a normal savings plan. Exit tax will apply on certain chargeable events if there is any investment profit (gain) on the plan.
Are there certain restrictions to these plans?
There are some revenue restrictions and requirements. If these rules are not satisfied for any reason, the plan will lose its exemption from gift tax and could actually increase the beneficiaries’ liability.
Joint life plan
In the case of a married couple, who have made Wills leaving everything to each other on first death, it would be better if a S73 savings plan was arranged on a joint life last survivor basis so that death within the first 8 years would not unintentionally end the plan before it had reached its eight anniversary and its ability to pay Gift Tax.
Source: LIA Journal, July 2017; Irish Life Advisory Services.