CAT Guide - Insurance Policies used for Payment of Tax
Section 72 and 73 policies are special insurance policies taken out specifically to be used to discharge Inheritance Tax (section 72) and Gift Tax (section 73) although there is a certain amount of interchangeability between the reliefs applicable to both policies. The proceeds of the policies, in so far as they are used to discharge any gift or inheritance tax, are not themselves liable to tax. However, if there is any part of the proceeds remaining after the tax liability has been discharged, this excess is liable to gift/inheritance tax.
Section 72 provides for the exemption of the proceeds of certain qualifying policies in so far as the proceeds are used for the payment of inheritance tax arising on the insured person’s death or within a year of his/her death.
A qualifying insurance policy is a policy of insurance:
- which is in a form approved by the Revenue Commissioners;
- in respect of which annual premiums are paid by the insured during his/her life (note that a single premium policy would not qualify);
- which is expressly effected under this section for the purpose of paying relevant tax.
"Relevant tax" means inheritance tax payable in respect of an inheritance taken under a disposition made by the insured where the date of inheritance is the date of death of the insured or within one year of the death. Relevant tax includes inheritance tax payable on property passing by survivorship or nomination as well as property passing under a will or intestacy.
As well as a single life policy, Section 72 policies can be effected by two spouses or two civil partners. The proceeds are payable on the death of the survivor of the spouses or civil partners, or on the simultaneous death of both. A life tenant can also effect a policy to cover the tax arising on his/her death under a disposition made by the original disponer.
Section 73 provides for the exemption of the proceeds of certain qualifying policies that are used to pay gift or inheritance tax arising in connection with a gift made by the insured. The gift must be made within one year of the proceeds of the policy becoming payable.
A qualifying insurance policy is a policy of insurance:
- which is in a form approved by the Revenue Commissioners;
- in respect of which annual premiums are paid by the insured;
- in respect of which there must be a minimum eight year funding period. However, the proceeds can be used at any time during this period if the insured dies or becomes critically ill;
- which is expressly effected under this section for the purpose of paying relevant tax;
- the proceeds of which are payable on the appointed date.
- The "appointed date" is a date at least eight years after the date on which the policy was taken out or where the insured becomes critically ill or dies before that date.
July 2011