Multi-Generational Tax Planning: a case study

We’ve talked a lot about using Section 72 in our estate planning lately. However, it can feel a little abstract just hearing the technicalities. So, today I’ll demonstrate how it could work for you, using a case study.

In my last case study we used PRSAs to extract cash from a family business. For the sake of simplicity and continuity, we’ll use the same family and the same scenario for this Section 72 case study.

The family and their situation

Following the PRSA steps in the previous case study, the next task we tackled for this family was figuring out how to help fund what was going to be a significant CAT bill.

Some facts of the case:

• Posh and Becks had previously taken a good chunk of money from the company and put it into PRSAs for the kids. This isn’t considered a gift, as their children were employees of the company.

• They are already using small gift exemptions to gift the kids €6,000 per annum personally (€3,000 from Posh and €3,000 from Becks).

• Additionally, they’ve maxed out the threshold for parents to children by gifting them €335,000 (€400,000 from Jan 1^st 2025) (they plan on topping this up by another €65,000 as CAT Thresholds are increasing) each to help with buying their first homes. This means any future gift or inheritance will be taxed at 33%.

Posh and Becks’ stance is that if the kids inherit cash and must hand over 33% of that to revenue, in their own words, “that’s the kids’ problem and not ours”.

However, they do have a problem with their limited company.

Posh remains the sole shareholder and they still have around €3.6million in the business. When they die, the kids will inherit their shares in the business. The CAT bill will be roughly 33% – that totals a whopping €1,200,000.

However, the cash would still be in the company. They’d end up either having to take cash from the company and pay tax on that just to pay their CAT bill, or they’d have to use up the other cash they have.

The solution

This is where Section 72 comes in.

We proposed a solution here that would allow them to pay the CAT for the kids. This has the benefit of keeping the company alive and would allow the kids to leave cash in the business, where it can be invested until they need to withdraw income from the company.

We applied for Section 72 life cover with a sum assured of €1.2million. When the proceeds of Section 72 life cover are used to pay a CAT bill, they don’t form part of the estate themselves. When both Posh and Becks die, this policy will pay out and be used to pay the CAT bill on the company shares.

The benefits

There are a few more important benefits as well:

The premium for this policy is fixed. It doesn’t get more expensive as Posh and Becks get older. We mapped this out in their financial plan to show them that they could afford it.

When they’ve paid into the policy for 15 years, they’ll have two additional benefits:

• They can stop paying the premium. They’d be left with a fixed level of cover that is guaranteed to pay out on death.

• They can choose to cancel the policy. They’d then take back 70% of the premiums they have paid as cash.

If they were to invest the premiums themselves, they’d just end up building an even bigger tax bill. This is because 33% of what they saved would be liable to CAT.

We then confirmed the plan with their tax advisors and solicitors. Crucially, their solicitor advised that their Will must clearly state that the policy be used to pay the CAT Bill on death. If it isn’t stated in the Will, it’s just treated as regular life cover.

What next?

You should seek advice from a qualified, experienced professional before you make any decisions.

This could be:

• Whoever does your business accounts.

• An independent tax advisor.

• A pensions and financial planning expert, such as Metis Ireland.

If you’d like to discuss your plans for your estate upon your death, call us on 01 908 1500 or email us at info@metisireland.ie.

Cian Callaghan
Private Client Manager