The old cliché comes to mind when discussing succession planning. You know the one, death and taxes…. You’ve worked hard all your life to own your home, pay off debts, secured large deposits/investments, purchase a second property… the list goes on. Now you’re faced with the scenario where your beneficiaries have to sell a portion of these assets in order to satisfy the tax man. They will only benefit from as little as 66% of the value of said property. But by understanding the scenarios and asset transfer they can avoid this.
What are the scenarios?
Broadly speaking there are three scenarios that can be come about:
- Transfer ownership while you’re living. Thus discharging all responsibility to your beneficiaries before you die
- Make provisions for your wishes upon death
- Untimely death without provisions being made
Did you know you have the option to mitigate the potential tax bill for your beneficiaries with two of these scenarios? Even where you believe you won’t incur a tax bill for the transfer, it is worth considering the future. Remember current Revenue CAT thresholds and tax rates are only that, current! It would be remiss to take them as guaranteed.
A closer look at Scenario 2
Scenario 2 is the most frequently seen case that our clients present. Yes they have a Will. And some level of discussion has been had with adult children, extended family and beneficiaries. Yes too there will be a big tax liability. There’s not much can be done about that. At least that is the perception without exploring all the options.
What our clients don’t always know is that provisions can be made to protect your loved ones from this tax bill. One such provision is what’s known here in Ireland as a Section 72 policy. It is a life assurance policy. But unlike a typical life policy, it does not create an additional tax bill in the hands of your estate.
Example: Section 72 Policy
The below example gives a very crude example of the difference.
Let’s assume you have one beneficiary (a child) who has already availed of their full Category one CAT threshold of €335,000 when you transferred your second property to them 5 years ago
Scenario 1 incurs a Revenue bill of €264,000 for the beneficiary. That is 88% of your cash and investments go straight to Revenue. Scenario 2 incurs a bill of €660 with the family home. 100% of cash and investments to into the hand of your elected beneficiary.
Another, less known about option, is a Section 73 savings policy. The regular investment policy is set up at the outset with this option included. Premiums are paid for a minimum of 8 years, the person(s) giving the gift/inheritance takes out the policy; they are also the owner(s) of the policy. Once you have met the criteria for the Section 73 relief, after 8 years the policy can be encashed and proceeds used to pay the gift tax liability.
Financial Advisors the length and breath of the country talk about risk daily. Market risk, volatility factors, capital at risk, the list goes on. What greater risk is there to those you care about most than your untimely death without a Will or with a significant change that was put on the long finger.
If you’d like to take a closer look at planning your financial future, asset transfer options and what kind of plan is right for your circumstances, just get in touch with us at Quintas Wealth Management, because we know what counts.
2 May 2023