Insurance for CAT

Overview

The CAT legislaiton  provide that the proceeds of life insurance policies, taken out expressly to pay CAT, are exempt from tax provided certain conditions are satisfied.

For the inheritance tax exemption, the main condition is that the inheritance must be taken on or after the death of the insured person and not later than one year after this death.

For the gift tax exemption, the main condition is that the proceeds from the policy must be payable on a date that is more than eight years after the date on which the policy is effected.

S. 72 Qualifying Inurance Policy

Section 72 provides that the proceeds of a “qualifying insurance policy” taken out by the insured person expressly to pay inheritance tax and approved retirement fund tax due by his or her successors are exempt from CAT, provided certain conditions are met. The policy proceeds are not taken into account for aggregation purposes.

A “qualifying insurance policy” is one:

• hat is in a form approved by Revenue,
• in respect of which annual premiums have been paid by the insured person during his or her lifetime, and
• that is specifically taken out under section 72 to pay “relevant tax” (i.e. inheritance tax due and payable in respect of a bequest made by the insured person).

Variants

The relief applies to the following:

• single- life policies; The insured takes out a life policy under section 72 and bequeaths the proceeds of the policy to his or her executors on trust or to a named successor to pay “relevant tax” arising on his or her death.
  The insured person may provide for payment of the proceeds on the death of the insured person to a named beneficiary contingent on a specified event; for example, the policy may specify that the proceeds will go to the named beneficiary provided he or she survives the insured person by a specified time period but if this condition is not met then the proceeds will go to another named individual.
• Joint-lives policies ;Spouses or civil partners may take out a joint-life policy under section 72 under which annual premiums are paid by either or both of them during their joint lives and by the surviving spouse/civil partner following the death of one and which provides for the payment of the proceeds on the death of the second individual.

S. 73 Qualifying Insurance Policies

There is a  similar relief for “relevant insurance policies” taken out by the insured person expressly for the payment of gift tax on a lifetime dispositions. A “relevant insurance policy” is one:

• that is in a form approved by Revenue,
• in respect of which annual premiums have been paid by the insured person during his or her lifetime,
• the proceeds of which are payable on the “appointed date”, and
• that is specifically taken out under section 73 to pay “relevant tax” (i.e. gift tax or inheritance tax due and payable in respect of an lifetime gift.

The “appointed date” is a date that is more than 8 years after the date on which the policy is effected. This time requirement is shortened to an earlier date on which theproceeds are paid where the insured person, or his or her spouse or civil partner, dies or becomes critically ill.

The relief does not apply to tax liabilities arising on appointments of property from an inter vivos discretionary trust set up by the insured person. Any unused proceeds of a section 73 policy are deemed to be taken as a gift and are subject to CAT.

Qualifying conditions

The  policy must be in a form approved by Revenue. A policy must be a whole-of-life policy, a whole-of-life policy with premiums ceasing at a specified age, an endowment-assurance policy, a term assurance policy or any other policy approved by Revenue.
Where there is more than a single life insured, the policy may be a contingent life policy or a joint lives last survivor policy.

The policy must be taken out by an insured person on his or her own life or, by a married couple or civil partners on their joint lives, in accordance with either section 72 or section 73, as appropriate. The policy must specify that it has been effected under section 72 or section 73, as appropriate.

Annual Premiums

A section 72 policy must have a ratio of sum assured to annual premium of at least 8:1, or in the case of a policy with a premium loading for medical, health or occupational reasons, a ratio of at least 6:1. These ratios must be maintained throughout the life of the policy and the sum assured must be net of any debt due on such sum.

Annual premiums must be paid. Premiums under a section 73 policy must be paid annually for a minimum period of eight years. If annual
premiums cease to be paid, no further premium may be added, i.e. a policy may not be revived after it has lapsed due to non-payment of premiums.
Revenue accepts that the requirement for the insured person to pay annual premiums is met where, for bona fide policies, the premiums are paid, for example, quarterly or monthly, provided the latter amounts are derivatives of an annual premium. T

Minimum duration

Section 73 requires that the policy must be for a minimum duration of 8 years. A policy cannot mature before this “appointed date”.
More than one benefit can be drawn from a section 73 policy and therefore there can be more than one ‘appointed date’ in relation to such a policy.

However, this date may be determined as earlier than the statutory date where the proceeds of a policy are paid on the critical illness of the insured. A critical illness benefit is a benefit payable under a policy in the event of the insurer admitting a claim, in accordance with the policy conditions, that the insured has contracted or undergone a life-threatening illness or disability, such as:
(a) Heart attack,
(b) Coronary artery disease surgery,
(c) Stroke,
(d) Cancer,
(e) Paralysis,
(f) Major organ transplantation,
(g) Multiple sclerosis,
(h) Kidney failure, or
(i) Permanent and total disablement.

Premiums paid by the insured person

Sections 72 and 73 require that annual premiums must be paid by the insured person. However, a policy will still qualify as a section 72 or section 73 policy if it is effected by an insured person who is an employee and:

•  the premiums, though paid by the employer are a benefit-in-kind chargeable to income tax in the hands of the insured, and
•  no deduction is claimed for income tax purposes by the insured person in respect of those premiums.

Policy proceeds must pay ‘relevant tax’

‘Relevant tax’ in sections 72 and 73 means gift tax, inheritance tax and/or Approved Retirement Fund Tax as appropriate, payable in respect of an inheritance or gift taken on a disposition made by the insured person.

The insured person should specify his or her wishes in regard to the distribution of the proceeds of the policy either: –
– through a specific designated successor(s) in his or her will,
– provided for a similar designation under a trust arrangement or
– specifically provided for within the terms of the policy itself.

Any unused proceeds of a section 72 or 73 policy is deemed to be taken as an inheritance or a gift, respectively and are taxed accordingly.

Time restrictions on use of policy proceeds

For inheritance tax to be considered ‘relevant tax’ for the purposes of section 72, it must be taken after the death of the insured person but not later than one year after the death.
In the case of a section 73 policy, ‘relevant tax’ means gift or inheritance tax payable in connection with an inter vivos disposition made by the insured within one year after the ‘appointed date’.

The relief does not apply to CAT payable on an appointment out of an inter vivos discretionary trust set up by the insured as this is
not ‘relevant tax’ under section 73.

Policy ceases to be a qualifying policy

A policy will immediately cease to be in a form approved by Revenue on the occurrence of any of the following:

• annual premiums in respect of a policy cease to be paid by the insured person before a period of eight years expires after the date the policy is effected, except where premiums cease to be paid by the insured person as a result of a benefit becoming payable under the policy on the critical illness or death of the insured person, or
• during any continuous eight-year period of the policy, throughout which annual premiums are paid by the insured person, the net premium paid in any continuous twelve month period is less than half the net premium paid in any other continuous twelve month period
• before a period of eight years expires after the date the policy is effected, the net premium paid in any continuous twelve month period is less than half the annual premium paid in the first continuous twelve month period of the policy

except, for the purposes of section 72 only, where such an occurrence results
from:

• a review of the policy carried out by the life assurance company pursuant to the policy conditions,
• a change in the sum assured provided under the policy, or
• the cessation of the payment of annual premiums after the expiry of the initial 8-year period as the result of a paid-up option being
  availed of for a reduced sum assured.

Exemption of certain policies of assurance

CATCA 2003 s.74 provides for an exemption from tax for certain policies of assurance on the life of a person where neither the disponer nor the donee or successor is domiciled or ordinarily resident in the State, at the date of the disposition and at the date of the gift or inheritance, respectively.

.  Otherwise, they would be taxable in the hands of third parties with no other connection to Ireland.  An interest in such a policy is exempt provided the interest, the disponer and the donees are neither domiciled or ordinarily resident in the State.