How to Save on Gift & Inheritance Tax

Navigating the complexities of gift and inheritance tax can be challenging, but with the right planning and tools, you can significantly reduce the tax burden on your beneficiaries. One effective strategy involves using a Section 73 savings plan. Here’s a comprehensive guide on how you can leverage these plans to save on gift and inheritance tax.

Understanding Section 73 Savings Plans

A Section 73 savings plan is a life assurance savings policy specifically designed to help fund the future payment of gift tax. The key advantage of this plan is that, provided certain conditions are met, the proceeds used to pay the gift tax liability will not increase the tax liability itself. This can be a significant relief for your beneficiaries.

Example Scenario

Consider John, who plans to transfer an investment property worth €750,000 to his son Paul in 8 years. Paul’s gift tax liability would be €136,950, assuming no other gifts or inheritances have been received. By saving €1,200 per month for 8 years in a Section 73 plan, assuming a 4% growth rate per annum, John can accumulate approximately €147,212. Paul can then use €136,950 of this amount to pay his gift tax liability, and this payment will not be considered an additional gift, thereby avoiding an increase in tax liability.

Key Benefits of Section 73 Savings Plans

1. Tax Efficiency: The proceeds used to pay the gift tax liability are exempt from additional gift tax, provided the qualifying conditions are met.
2. Flexibility: The policyholder retains control over the savings plan and can keep any excess funds once the tax liability is paid.
3. Structured Savings: Regular contributions to the plan help in systematic accumulation of the required funds over time.

Qualifying Conditions

To benefit from the tax relief under Section 73, certain conditions must be met:

• The policy must be specifically endorsed under Section 73 from its inception.
• Premiums must be paid annually (or more frequently) for at least 8 years.
• The policyholder and the life assured must be the same person.
• The proceeds must be used to pay gift tax within one year of the policy being cashed in.

Risks and Considerations

• Investment Risks: The value of your investment can fluctuate, and you may lose some or all of the money invested.
• Commitment: Regular premium payments must be maintained for a minimum of 8 years to qualify for the relief.
• Policy Compliance: Ensure all Revenue qualifying conditions are met to maintain the policy’s tax-efficient status.

Comparative Example: Savings Plan vs. Direct Payment

To illustrate the benefits of a Section 73 savings plan, consider the following comparative example:

In this example, using a Section 73 savings plan saves the beneficiary €45,193 in additional gift tax liability, demonstrating the significant advantage of this approach

Conclusion

Using a Section 73 savings plan can be a strategic way to manage and mitigate the impact of gift and inheritance tax. It allows you to plan ahead and ensure that your beneficiaries receive the maximum value from your gifts without the burden of additional tax liabilities.

For more details and personalized advice, contact Roban Financial. They can provide comprehensive guidance tailored to your specific financial situation and help you navigate the complexities of gift and inheritance tax planning.