The former British Prime Minister Harold Wilson once said: “I’m an optimist, but an optimist that carries an umbrella.” Many of the business people we meet have established and grown enterprises, requiring a high level of commitment and resilience and at some point, they start thinking about legacy and passing assets to the next generation. The good news is that they rarely have difficulty in finding people who are willing to accept their largesse. They may not be as happy about paying the Capital Acquisitions Taxes (CAT) that come with it, however there are solutions for those who plan ahead in a prudent manner.
There are plenty of reliefs that can help to mitigate the tax liabilities – but vitally, once planning has started early enough. My colleagues in PwC Private would recommend that any business owner should commence discussions around passing on intergenerational wealth well before age 60. For those that are likely to pass on assets over and above the various reliefs, business owners could consider insuring the tax liability that might arise for their beneficiaries.
Section 72 insurance is a whole of life policy, specifically approved by the Revenue Commissioners. It provides financial protection against potential inheritance tax liabilities faced by beneficiaries (typically children) upon the policyholder’s death. Where the policy remains in force until the insured person passes away, the proceeds of the policy will be paid out tax-free, if used specifically to cover an inheritance tax bill.
So how does this work? A Section 72 policy is an insurance arrangement and therefore we would be required to go through some typical steps involved in establishing any insurance policies. This consists of completing a fact find, policy application form and a medical questionnaire. In certain instances, the policy provider may seek additional medical information from your GP, with your permission. Once accepted, the policy is put in force and premiums are paid, usually by direct debit.
On death, the insurance company pays out a lump sum. In the case of a jointly held policy, the payout timing under the policy depends on the occurrence of the second policyholder’s death. The proceeds are distributed only when both lives named under the policy have passed away, and the Section 72 policy should be considered illiquid until the policyholder’s passing. At the point of payout, it provides a lump sum to the beneficiaries, who use the insurance proceeds to settle the inheritance tax bill. By doing so, they avoid the need to liquidate other assets to pay the tax.
There are alternatives such as saving or investing enough to accumulate money to generate the same net of tax bequest to the estate. There is also the approach of just letting the next generation pay their own tax liability – also known as “SKIing” or Spending the Kids’ Inheritance. But if you know you want to find an efficient solution to a potential CAT bill, you could investigate insuring against it – I think Harold Wilson would!
Section 72 policies need to be set up in line with Revenue requirements and in anticipation of a future CAT liability. They will fit particular client circumstances only
Bernard Walsh is Director – Pensions & Investments at PwC
