Forward thinking Financial & Estate Planning

Following on from the theme of my previous article this piece also focuses on the link between financial planning and estate planning. The benefit of prudent financial and estate planning can have the dual effect of protecting the beneficiaries of an estate but also the contents of the estate. This article explores the plans that can be put in place to prepare for a Gift Tax Liability as opposed to an Inheritance Tax Liability. The key as with Inheritance Tax Planning is to have funds within a revenue approved structure to prepare for this eventuality, by having funds to pay the tax liability due on the transfer of assets valued above the beneficiaries threshold. This article will explore the difference between Inheritance Tax and Gift Taxrules and thresholds regarding gift taxhow to put a revenue approved plan in place to prepare for this Gift Tax liability and finally how this plan comes to fruition to fulfil its purpose.

The difference between Inheritance Tax & Gift Tax

An Inheritance Tax when beneficiaries inherit an asset valued above their threshold, the excess over their threshold is charged @33%. Assets are passed upon death to the beneficiary so a S.72 Life Policy taken out to pay this Inheritance Tax is the only way to provide funds, to pay this tax bill. This all takes place after the testator has passed away and his or hers assets are distributed in accordance with his wishes via his will or rules of intestacy. Whereas, Gift Tax is charged on gifts passed during life, which are valued over a beneficiary’s threshold. Both taxes are charged at 33%. Putting a plan to provide funds to pay each requires different structures. While the percentage charge is the same, Inheritance Tax Planning and Gift Tax Planning are quite different.

Gift Tax Planning also allows the giftor to be involved in the actual transfer of the asset/s. This may be a preferable scenario for some people. Also a parent for example may want to pass certain assets such as a property during their lifetime to their child when they reach a certain age and the rest of their estate when they pass, inheritance tax planning can be put in place for the rest for the rest of the estate if necessary. But what about a Gift Tax Liability that arises on the Gift made during their lifetime. People may prefer the idea of their beneficiaries inheriting assets after they pass. But there may also be barriers to putting in place a S.72 Life Policy due to medical issues which render them unable to get medically accepted for such a policy. So what is the alternative? How can you transfer assets during your lifetime and have funds in a revenue approved structure to pay the Gift Tax Liability, which may arise. Whether it is a person’s preference or only option the tax efficient revenue approved structure for funding for Gift Tax is the same.

Illustration of Gift Tax Liability & use of S.73 Savings Plan

Take a scenario of a parent passing assets on to one of their children or only child during their lifetime. If the value of the asset/s he/she passes on are over his child’s threshold recently raised to 335,000 plus the small gift exemption of 3,000 33% Gift Tax will be charged on the excess. The difficulty is greatly increased when it is a physical property which is passed as it is not a liquid asset. . A life policy obviously cannot be used to provide funds to pay this liability. But they can transfer their assets during their life instead and put a plan in place to fund for the Gift Tax @33% that would be payable. Providing additional funds from a current account to pay the Gift Tax only increases the liability for the beneficiary as seen in this example:

  • A father wants to gift a house to his daughter in 10 years’ time at her 30th birthday valued at 500,000.
  • Currently – Threshold 335,000 + 3,000 small gift exemption = 338,000.
  • Gift Tax payable on that – 500,000 – 338,000 = 162,000 excess @33% = 53,460 Gift Tax Liability
  • Father may say he will just give daughter the 53,460 when he transfers the property to pay the Gift Tax. However this only increases the liability payable as it is another gift on top of the excess – raises it by 17,641.80 to a 71,101.80 liability.
  • Therefore funds need to be accumulated in a Revenue approved structure where they’re endorsed to pay Gift Tax and do not serve only to increase the liability.
  • This structure is a Section 73 Regular Saver Plan this plan is endorsed under section 73 of the Capital Acquisitions Tax Consolidation Act (CATCA) 2003 for the purposes of paying Gift Tax.
  • As long as the rules and conditions are satisfied funds can be ring-fenced within this plan and can be used to pay the Gift Tax Liability upon transfer of an asset and will not add to the liability as in the scenario above.
  • The rules are: regular premiums must be contributed to the plan for 8 years, after 8 years the funds become eligible to be used to pay a Gift Tax Liability. This is the minimum requirement.
  • There is no obligation to make the gifts after 8 years. After 8 years the funds within the plan are revenue approved to be used under s.73.
  • Consistency is vital for this plan to be eligible for its purpose. Premiums must be paid consistently for those 8 years and the regular premium is it monthly or annually cannot reduce or increase by more than 50%.
  • If these conditions are satisfied then in the above scenario if the Father takes out a s.73 savings plan now to fund for the gift tax payable when he transfers the assets in 10 years.
  • He could encash this policy and use the funds within it to pay the Gift Tax Bill. Thus protecting his daughter from a hefty Gift Tax Bill. As the s.73 Plan and funds within it are revenue approved for this purpose.
  • Once the plan is encashed transfers of assets must be made within 12 months for funds to qualify to pay the Gift Tax liability.
  • A s.73 Savings Plan is a forward thinking provision whereby funds are accumulated in the background to pay an impending Gift Tax Liability.
  • A person is not limited to one plan several may be set up and may coincide with assets which the person may see being transferred at different points in time.
  • If the person who takes out the plan passes away while the plan is in force it becomes part of their estate.
  • If a person decides not to use it to pay a Gift Tax it is just a normal savings plan. Exit Tax is payable on investment gain.

To Conclude

The scenario above seeks to walk through the process of planning for a Gift Tax Liability from identification of who will be gifted which assets, the liability which will be due because of the value of the asset/s being over that person’s threshold and then how to have funds in place within a revenue approved structure to pay that liability. A s.73 Savings Plan is a unique way to fund for a Gift Tax Liability and for those who see a potential Gift Tax Liability down the line and want to pass assets during their lifetime or that would not be able to get a S.73 whole of life policy should form a central part of their overall financial and estate planning. Guidance around setting up this plan and the strict rules which apply for the plan to be eligible and fit for purpose is vital.

Here at Niall G Lynch Insurance Brokers we provide tailored financial planning and guidance, as with the S.73 Regular Savings Plan the savings policy is a vehicle to fulfil your goals in this case to protect the beneficiary, asset or estate from a Gift Tax Liability and not having funds in the most tax efficient structure to pay this.