A lesser known but highly effective inheritance planning strategy

Many financial advisers are familiar with using life assurance policies under Section 72 CAT Act 2003 to fund Inheritance Tax. But far fewer explore the potential of using a life assurance savings plan under Section 73 to fund Gift Tax, a strategy that could offer significant tax savings and more flexible intergenerational wealth transfer planning.

Let’s outline how Section 73 works, who it’s for, and how to put it into action effectively.

Why Consider Gifting Assets Early?

When someone gifts assets to a child or other beneficiary (excluding spouses or civil partners), the recipient’s Capital Acquisitions Tax (CAT) threshold is used up. Once exceeded, the beneficiary pays 33% Gift Tax on the value above the threshold, identical to Inheritance Tax.

So why gift early rather than wait?

1. Earlier wealth transfer – A 60-year-old couple might not pass on wealth until their 90s if waiting until death. Gifting now can benefit children in their 30s or 40s when they’re more likely to need financial support.
2. Future asset growth is excluded – Once an asset is gifted, any future growth in its value is outside the CAT regime, helping reduce long-term tax exposure.

What Is Section 73 Relief?

Section 73 of the Capital Acquisitions Tax Act 2003 allows individuals to fund the Gift Tax liability of a beneficiary without triggering an additional gift tax, but only if specific conditions are met.

Here’s how it works:

• Let’s say a parent gifts a property, worth €500,000.
• The Revenue Gift Tax bill amounts to approx €31,000.
• The donors, parents, have various savings and investments.
• However, if the donor’s pay the Revenue the €31,000 tax bill, or indeed gift the beneficiaries the same amount, they will trigger a Revenue gift tax bill of a further ~€15,000.
• If they had accumulated in a regular savings plan, which is endorsed for the option of utilising as a Section 73 savings plan (running for at least eight years), they could withdraw that amount and use it to pay the tax directly, without additional tax liability for the beneficiary. Therefore, saving at least €15,000, not to mention the investment performance !

That’s a €15,000 tax saving, just by using the right structure, for a monthly contribution of approx €150.

Key Requirements for Section 73 Relief

To qualify for the relief, a savings plan must meet these conditions:

• Run for at least 8 years, with at least 8 annual premiums paid.
• Premiums must be broadly level, the amount paid in any one year can’t be more than double the amount paid in another.
• It must be expressly effected under Section 73 CAT Act 2003, either noted on the proposal form or via an accompanying letter.
• The gift must occur within one year after drawing on the plan.
• The savings plan can be a regular life assurance savings plan, not in trust and without the need for life cover.
• The plan is subject to exit tax, like any other investment-based assurance product.

Important: If premiums stop within the first eight years, Section 73 relief is lost.

Who Should Consider This Strategy?

Section 73 savings plans are particularly useful for:

• Clients who can’t obtain Section 72 cover due to age or health.
• Individuals planning early or phased wealth transfer to children or other beneficiaries.
• Clients with capital they want to move out of their estate over time, without large up-front gifting.

Funding the Plan: Capital Conversion Example

Often, clients fund Section 73 plans by drip-feeding capital rather than from income. For example:

• A client with €200,000 in capital sets up a plan contributing €25,000 per year over eight years.
• After eight years, the plan is worth €200,000 (assuming investment growth offsets charges and exit tax).
• The client then makes an asset gift to a child and pays the €200,000 Gift Tax liability using the plan.

Without Section 73, they would have needed €298,500 to achieve the same result, due to the compounding effect of Gift Tax.

This means they saved €98,500, simply by using the Section 73 route.

Flexibility & Control

One of the most attractive features of a Section 73 savings plan is flexibility:

• The client isn’t obliged to make a gift or use the plan for Gift Tax after eight years, it’s optional.
• The plan can be used multiple times, for different gifts, provided the one-year rule is observed for each drawdown.
• If not used for Gift Tax, the plan can still be encashed for the policyholder’s own benefit.

What About Life Cover?

While life cover isn’t required, adding a cover amount of:

• 8x the annual premium (or 6x for those in poor health)

means the plan could also qualify under Section 72 to fund Inheritance Tax on death.

This offers dual benefits for those looking to build both Gift Tax and Inheritance Tax strategies into their estate planning.

Special Case: Joint Life Last Survivor Plans

In the case of a couple who have made Wills passing everything to each other on first death, a joint life last survivor plan is recommended. This ensures the plan continues even if one spouse dies within the first eight years, preserving eligibility for Section 73 relief.

Final Thoughts

For clients who want to pass assets efficiently to the next generation, especially those unable to secure life cover, Section 73 savings plans offer a powerful, tax-efficient alternative to conventional strategies.

As with all estate planning strategies, it’s crucial to understand the Inheritance tax rules on gifts.

Need help structuring a Section 73 plan? Get In Touch