Irish house prices have confounded expectations and continued to rise despite a pandemic that threatened to de-rail the global economy. According to figures from DNG, house prices in July were 11.1% higher on a national level and 9.4% higher in Dublin than they were in June 2020. The average price of a resale property in Dublin now stands at €482,617 which is at a level not seen since 2009.
Consider the latest increase in property prices with the CSO Household Finance and Consumption Survey 2018. The CSO survey showed that the wealthiest 10% of households held on average 82.2% of their wealth in property (both primary residence and rental property). There is one inescapable fact – there will be very, very large inheritance tax bills in the future.
The role of a financial planner is to look around the corners and to see what may be coming down the track in the future. While some individuals may not be overly concerned if their beneficiaries (most likely children) face large inheritance tax bills, others may wish to see if there is anything that can be done to mitigate these taxes in the future.
Currently the maximum lifetime allowance for capital acquisitions tax (inheritance tax) for a child is €335,000 (Group A). This allowance has been very volatile over the last few decades. There was a steady rise in the threshold from 1989 all the way up to €542,544 before it was slashed to €225,000 between 2012 and 2015. While the threshold has crept up again, any future increases will most likely be quite modest.
Consider a couple aged 60 who have an estate valued at €1m. As the kids (2) will benefit from the Group 1 threshold which is €335,000 each they will need to cover a taxable inheritance of €330,000 or a tax liability of €108,900 in today’s terms.
The good news is that while we cannot completely eliminate the tax bill, there are ways to mitigate it by use of section 72 whole of life insurance policies. Section 72 relates to the part of the tax code that allows for the proceeds of a qualifying insurance policy to be free from inheritance tax once the proceeds are used to meet an inheritance tax liability.
Previously certain whole of life policies increased their premiums as the policy holder aged. This meant that many people were forced to give up their policies due to unaffordable premiums which gave the whole of life policy a bad reputation. However, there are now new whole of life policies where the premiums are guaranteed for life. Furthermore, there is now a lot more flexibility surrounding whole of life policies. It is possible to get the following options:
- After paying the premiums for 15 years or more, it is possible to stop paying and lock in a level of cover.
- After paying the premiums for 15 years or more, it is possible to cash in the policy and receive back 70% of premiums paid.
The cost of insuring €108,900 today (or €164,722 if index linked to age 100) is €217.04 per month.
If the parents did cash in the cover after 15 years, they would have effectively received life cover for the first 15 years at a cost of €89.32 per month. This compares well against regular term assurance for the same level of cover over 15 years which would cost €125.43 during this term.
Furthermore, if they were to maintain the policy, the premiums would cease at age 100. By that time they would have paid €171,002 in premiums. However, it would cost €245,853 to cover a tax bill of €164,722 as the money to pay the tax bill would also be liable to inheritance tax. Therefore, the minimum benefit from this policy would equate to €74,852.
The example above highlights the benefits of section 72 policies. Rather than considering the premiums as a monthly cost, they can instead be viewed as money being paid to build up a future financial asset.