Revenue Note for Guidance

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Revenue Note for Guidance

72 Relief in respect of certain policies of insurance

Summary

This section grants exemption in respect of the proceeds of certain life insurance policies which would otherwise be liable to inheritance tax on the death of the insured person. The section provides that the proceeds of any qualifying insurance policy taken out under the section by an insured person on his/her life will be exempted from inheritance tax in so far as such proceeds are used to pay approved retirement fund tax, being tax which a qualifying assurance manager is obliged to deduct in accordance with the provisions of section 784A(4)(c) of the Taxes Consolidation Act 1997, i.e. tax payable in respect of a child aged 21 or over on the death of the beneficial owner of an approved retirement fund (ARF) or inheritance tax arising on his/her death, or within a year of his/her death, under a disposition made by him/her (e.g. under his/her will). Any part of the proceeds not so used is liable to inheritance tax.

The exemption also applies to joint policies effected by spouses to cover inheritance tax payable—

  • on the death of the surviving spouse/civil partner,
  • on the simultaneous deaths of both of them, or
  • in the event of the surviving spouse/civil partner dying within 31 days of the death of the other spouse/civil partner.

It also applies where a policy is taken out by a life tenant to pay the tax arising on his/her death under a disposition made by someone other than that life tenant.

Details regarding the policies that qualify for the exemption are set out in a Statement of Practice (SP-CAT/1/04).

Details

(1) “approved retirement fund tax” means tax which a qualifying fund manager is obliged to deduct in accordance with the provisions of section 784A(4)(c) of the Taxes Consolidation Act 1997, i.e. tax payable in respect of a child aged 21 or over on the death of the beneficial owner of an approved retirement fund (ARF). An approved retirement fund is an alternative to an annuity and takes the form of a capital sum on retirement that can be retained in a tax-free vehicle until distributions are made from the fund.

“insured” means an individual and his/her spouse/civil partner provided—

  • they were a married couple or registered civil partners at the date the policy was effected,
  • annual premiums are paid by either or both of them during their joint lives and by the survivor of them during the life of the survivor, and
  • the proceeds of the policy are payable on the death of such survivor, or on the simultaneous deaths of such spouses/civil partners.

Where the proceeds of the policy are payable on the death of the surviving spouse/civil partner, “insured” means that surviving spouse/civil partner. The proceeds of the policy are deemed to have been provided by such survivor, as disponer.

Where the proceeds of the policy are payable on the simultaneous deaths of both spouses/civil partners, “insured” means each of the spouses/civil partners. Each such spouse/civil partner is deemed to have provided the proceeds of the policy to the extent that such proceeds are applied in paying the relevant tax of that spouse/civil partner.

Where the proceeds of the policy are not applied in paying relevant tax, each spouse/civil partner is deemed to have provided the proceeds of the policy to the extent that they are comprised in an inheritance taken under a disposition made by that spouse/civil partner.

“qualifying insurance policy” means a policy of insurance—

  • which is in a form approved by the Revenue Commissioners for the purposes of the section (see paragraph 6 of the Statement of Practice SP-CAT/1/04 as regards the criteria for Revenue approval for policies issued on or after 29 May 1991);
  • in respect of which annual premiums are paid by the insured during his/her life; and
  • which is expressly effected under the section for the purpose of paying relevant tax.

“relevant tax” means approved retirement fund tax and inheritance tax payable in respect of an inheritance but excluding, in the computation of such tax, an interest in a qualifying insurance policy taken—

  • on the death of the insured,
  • under a disposition made by the insured, where the inheritance is taken on or after the date of death of the insured and not later than one year after that death, or
  • under a disposition made by the spouse of the insured, where the inheritance is taken only in the event of the insured not surviving the spouse by a period of up to 31 days.

The qualifying insurance policy must be—

  • a policy of insurance within the meaning of paragraphs (a), (b) or (c) of the definition of the term “insured” in subsection (1), or
  • a policy of insurance, where the insured is an individual and the proceeds of the policy are payable only on the contingency of the insured surviving that spouse/civil partner.

(2)(a) An interest in a qualifying insurance policy comprised in an inheritance taken under a disposition made by the insured will be exempted from tax in relation to that inheritance, and will not be taken into account in computing tax, to the extent that the proceeds of the policy are applied in paying relevant tax (as defined).

(2)(b) An interest in a qualifying insurance policy which is comprised in an inheritance taken under a disposition made by the insured will, to the extent that the proceeds of the policy are not applied in paying relevant tax, be deemed to be taken on a day immediately after—

  • the date of the death of the insured, or
  • the latest date (if any) on which an inheritance is taken in respect of which that relevant tax is payable,

whichever is the later.

(2)(c) For the purposes of the section, a credit is given for the approved retirement fund tax paid by the qualifying fund manager. This ensures that the requirement that must be satisfied in subsection (2)(a) in order to obtain the exemption (i.e. that the proceeds of a qualifying insurance policy are applied in paying relevant tax) can be met.

Examples of situations where the section applies:

Example 1

Andrew Byrne died leaving an estate which included €75,000, being the proceeds of a qualifying insurance policy, payable to his personal representatives. In his will, he bequeathed the proceeds of the policy to his executor on trust to pay the relevant tax (within the meaning of section 72) arising on his death, any balance of the proceeds to fall into his residuary estate. He bequeathed his residuary estate equally absolutely to his son, Dermot Byrne, to Dermot’s wife Evelyn and to Dermot’s son Robert.

In the first instance, the inheritance tax due is calculated in respect of the estate ignoring the proceeds of the policy.

Dermot’s tax liability is Nil,

Evelyn’s tax liability is €20,000,

Robert’s tax liability is €40,000.

Evelyn and Robert receive legacies of €20,000 and €40,000 respectively from the proceeds of the policy to pay their tax. Those amounts are not liable to inheritance tax. The balance (€15,000) of the proceeds of the policy goes equally to Dermot, Evelyn and Robert and is taxed as an inheritance of €5,000 taken by each of them on the day after Andrew’s death.

Dermot’s tax on €5,000 is Nil,

Evelyn’s tax on €5,000 is €1,000,

Robert’s tax on €5,000 is €1,000.

Example 2

Michael Moran and his wife, Patricia, took out a qualifying insurance policy. The policy provided that the proceeds are to be payable, on the death of the survivor, to the personal representative of that survivor. Michael paid all the premiums during his life.

Michael died and, under the terms of his will, he left his entire estate to Patricia absolutely. Inheritance tax is not payable on the inheritance taken by Patricia (section 71). Patricia paid the premiums in respect of the policy after Michael’s death. In her will, Patricia left all her property to her son, Henry. The policy can be used to pay the inheritance tax payable by Henry on Patricia’s death.

Example 3

Edward Hanrahan took out a qualifying insurance policy during his life. In his will, he bequeathed his estate absolutely to his wife, Joan, but should she not survive him by 30 days, his estate was to pass absolutely to his son, Vincent. Edward and Joan were involved in a car accident. Edward died immediately and Joan died 10 days later. Vincent inherited Edward’s estate absolutely under the terms of the will. The section ensures that the proceeds of a qualifying insurance policy, taken out by Edward during his life and payable on Joan’s death, are available to pay Vincent’s tax.

Example 4

William O’Connor left his estate to his niece, Catherine, for life, and, after her death, to her son, George, absolutely. The definition of “relevant tax” includes inheritance tax payable in this situation. If Catherine took out a qualifying insurance policy, the proceeds of that policy can be used to pay the inheritance tax arising on her death under the terms of William’s will.

Relevant Date: Finance Act 2015