Section 73 – Saving for Gift Tax

Saving for a future Gift Tax Liability

Are you considering the possibility of gifting money or assets to your family during your lifetime? It’s important to be aware that this can have tax implications for the person receiving the gift. However, you could achieve significant tax savings on behalf of your beneficiary by setting up a specific savings policy.

What is a Section 73 policy?

A Section 73 policy is a financial strategy designed to cover Capital Acquisitions Tax (CAT) liabilities associated with future gifts made during the policyholder’s lifetime.

What is Capital Acquisitions Tax?

Capital Acquisitions Tax, commonly referred to as the gift and inheritance tax, applies to all gifts and inheritances received. Individuals are permitted to accept a specified amount of gifts and inheritances throughout their lifetime without triggering this tax. Should the cumulative value received surpass this lifetime exemption limit, the tax is then imposed at a standing rate of 33% (as of October 2024).

How does a Section 73 policy work?

As of October 2024, a parent can gift their child assets up to €400,000 without incurring Capital Acquisitions Tax (CAT).

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For instance, Jane has a house worth €500,000 and intends to transfer its ownership to her son, Alex. Transferring the property in its entirety would result in a CAT liability of €32,010 for Alex, as it exceeds the tax-free threshold. To address this, Jane decided to implement a Section 73 policy, which is a specific savings plan. She will diligently contribute to this policy for a minimum duration of eight years. When the time comes to gift Alex the house, the money she saved will be used to pay his gift tax bill. The best part is that this saved money won’t be taxed again when it’s used to pay the tax on the house gift.

Notably, these funds are exempt from CAT when specifically used to satisfy the Revenue’s gift tax obligations; they are not subject to capital gains tax (CAT). This strategic approach enables Jane to manage the tax implications efficiently while facilitating the smooth transfer of her assets to Alex.

Please note that the foregoing scenario is provided only for illustrative purposes and should not be considered financial advice. Every individual’s financial situation is unique, so we highly recommend that you consult with one of our experienced financial advisors, who can offer tailored guidance and strategies that align with your specific circumstances.

Benefits of a Section 73 Policy.

Tax Efficiency: A Section 73 Policy stands out for its tax-free investment growth feature. This becomes particularly advantageous when using the funds from your Section 73 policy to cover a tax obligation tied to a gift. 

The amount drawn from the policy for this specific purpose does not attract Capital Acquisitions Tax (CAT), providing a financial edge by preserving the full value of the savings for the intended use.

Estate Planning: It serves as an estate planning tool, allowing individuals to allocate funds for their beneficiaries in a tax-efficient manner, ensuring financial stability for future generations.

Flexible Contributions: Contributions to a Section 73 policy can be adjusted over time, providing savers with the flexibility to increase or decrease their investment based on their financial situation. 

Note that your premium cannot increase or decrease by more than 50% within any given eight-year period.

Main conditions from a Section 73 Policy

  • The policy must be specifically established under Section 73 of the Capital Acquisitions Tax Consolidation Act 2003 with the intent of paying taxes. 

  • Premium payments must be made by the disponer rather than the beneficiaries.

  • It requires at least 8 years of premium payments. 

  • The policy should be held in one individual’s name, although married couples or civil partners can hold it jointly. 

  • The funds must be used to settle gift tax for a gift given within one year after receiving the policy proceeds. 

  • If the policyholder passes away before completing the minimum 8-year term or before the gift tax is settled, the policy’s proceeds will be included in their estate.

  • If there is any excess after paying the gift tax, it stays with the plan owner since it is their money.

  • If you stop making regular payments, even after eight years, you cannot resume them.

  • Your premium cannot increase or decrease by more than 50% within any given eight-year period.

  • Existing savings policies cannot be converted into Section 73 policies. To qualify for a Section 73 policy, a new policy must be taken out and explicitly endorsed under Section 73 of CATCA 2003 from the commencement date.

  • Not meeting the qualifying criteria set by Revenue leads to the forfeiture of the policy’s sanctioned status, making the policyholder disqualified from receiving Section 73 benefits.

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Browse through our Frequently Asked Questions below

  • The exit tax is levied on the profit generated within the savings plan. This tax is applied at eight-year intervals or upon any full or partial withdrawals made during the eight-year period.

  • Non-compliance with Revenue’s qualifying criteria means the policy will no longer be recognised as approved by Revenue, disqualifying you from Section 73 benefits. Transferring the proceeds from a policy that has lost its eligibility for Section 73 relief will result in an increased gift tax liability for the beneficiary.

  • Yes, it is possible to simultaneously benefit from both Section 73 and Section 72 policies under certain conditions.

    A plan to qualify for inheritance tax relief (Section 72) must include life insurance coverage that is at least eight times the annual premium. A unit-linked savings component must be featured to be eligible for gift tax relief (Section 73).