DEALING WITH INHERITANCE TAX BILLS

GET THE RIGHT LIFE COVER

Should you be buying a Section 72 life assurance policy to cover future inheritance tax bills, do the maths beforehand, advises Nick McGowan, director with the life insurance broker Lion.ie.

“Total up the value of all the assets that will form part of your estate — including property, investments, cash and anything of value,” said McGowan.

“Let’s say, this comes to €1.2m and you have three children who will receive an equal share of €400,000. Their tax-free threshold is €320,000 each, leaving a taxable inheritance of €80,000 per child. This is taxed at 33pc, giving each child an inheritance tax liability of €26,400, or a total liability of €79,200 for all three.

“You could therefore take out a Section 72 plan for €79,200. The proceeds would be used to pay their inheritance tax liability so your children get the full value of their inheritance.”

McGowan advised married couples to arrange Section 72 policies on a joint life, second death basis. “By doing this, on the first parent’s death, the assets will pass to the surviving spouse tax-free,” said McGowan. “On the second parent’s death, the Section 72 policy will pay out to cover the kids’ inheritance tax liability.”

The cost of a Section 72 policy will depend on age, health, the size of the inheritance tax liability you wish to provide for, and whether or not you are a smoker. You could, for example, pay €134 a month for a policy which covers an inheritance tax bill of €100,000 — if you’re a 50-year-old non-smoker when you first buy the policy.

Be sure to meet the tax rules around any Section 72 plan you buy. “The plan must be set up for the purpose of paying a future inheritance tax bill from inception as there are specific rules about what policies can be used for these purposes,” said a spokesman for AIB. “There are a number of Revenue rules around these policies.”

GET A LOAN

Should you be a facing a crippling inheritance tax bill, you may be able to take out a loan to cover the bill. This could be useful if you would like to hold onto a property you inherited, rather than sell it to settle the tax bill it triggered.

Most banks — including AIB, Bank of Ireland and KBC — offer loans to cover inheritance tax bills (as long as you can afford the repayments). The size of the loan, as well as the lender, will typically determine whether you can take it out as a personal loan or as a mortgage.

DRAW UP A WILL IF LIVING TOGETHER

As well as understanding and preparing for the inheritance tax bills which might arise for either partner, cohabiting couples should get up to speed on their inheritance entitlements.

“It is very important for cohabiting couples to draw up a will,” said Oonagh Casey Grehan of Fagan & Partners. Otherwise, if you die without making a will, your partner is likely to have no right to any share of your estate, apart from what was held jointly — no matter how long you have been living together.

By contrast, in a marriage or civil partnership, the surviving spouse or civil partner has a legal right to a share of a spouse’s estate when he or she dies, regardless of what was outlined in the deceased’s will.

Unmarried couples should also get advice around the redress scheme for cohabiting couples as not everyone qualifies for redress under this scheme.