Friday, 30 April 2021
Nithe i dtosach suíonna - Commencement Matters
I thank the Minister for coming to the House and the Chair for listing this Commencement matter. According to the tax and duty manual, under the capital acquisitions tax part 15 on insurance policies and in particular under sections 72 and 73 of the Capital Acquisitions Tax Consolidation Act, it is possible to put in place an insurance policy, the purpose of which is to meet the anticipated capital acquisitions tax which will occur on the death of any individual.The proceeds of the insurance policy do not effectively add to the size of the estate for the purpose of capital acquisitions tax and they are available to the personal representative of the deceased to discharge the CAT liability, usually inheritance tax, for relatives who the property owner wishes to protect. That is fine and it works reasonably well except that it can be expensive on some occasions. The strange thing about the insurance policy is that the wealthier the person providing the insurance is, the less of a burden it is to that person to avail of the policy. For example, somebody might want to provide for the likely CAT, which will occur if he or she dies and has to leave his or her home to a child or whatever. The issue is that one of the prerequisites for qualifying under sections 72 and 73 is that the person who takes out the insurance policy effectively has to pay the premiums himself or herself.
This issue has not been raised by wealthy people but it has been presented to me by a broker who operates in the Cork area that he sees injustices, namely that less well-off people who are not in a position to fund the premiums find themselves at a disadvantage compared with people who are better off in a similar situation. He tells me this would be remedied by allowing the likely inheritor to participate in the insurance policy. This could be done by noting his or her interest on the policy; making him or her a contributor to the policy; or exempting any assistance her or she gives to his or her parents to pay for the insurance from CAT, gift tax, income tax or whatever. His view is that as between people in relatively similar situations, the present requirement that the disponer under an inheritance should pay the insurance policy premia effectively discriminates unfairly against those with lesser means as opposed to those with greater means.
I ask the Minister of State to examine this issue and consider some means whereby the person for whose benefit the insurance policy is put in place could contribute to the extra expense imposed on the person who has to be the policyholder.
I thank the Senator for raising this issue. The proposal is as follows: "The need for the Minister for Finance to examine the feasibility of a legislative change to allow children to take out life cover in respect of their parents for the specific purpose of paying inheritance tax after the death of the parent(s)." I might come back to some of the other points the Senator has raised in my second contribution.
The issue of inheritance tax after the death of an individual's parents is a sensitive subject, and one where qualified financial advisers are available to advise. The Senator has been talking to a broker on that but I am talking about tax experts as well. He will also appreciate that the Minister for Finance is responsible for the legal framework for insurance and that neither he nor the Central Bank of Ireland can intervene in the provision or pricing of insurance products, as this is a commercial matter that individual companies assess on a case-by-case basis.This position is reinforced by the EU framework for insurance - the solvency Il directive.
With regard to the request from the Senator, I do not believe that this change is necessary, either in relation to insurance or the CAT legislation. In Ireland, I understand that the general practice where a parent wishes to prevent his or her child from having an inheritance tax liability is that the parent may take out a specific type of life assurance cover, generally referred to as section 72 cover, to which the Senator referred to Generally, the parent takes out life assurance for the purpose of covering any future inheritance tax liability on behalf of his or her child, rather than the children taking out a policy in respect of their parents. Section 72 life assurance policies are particular types of life assurance policies, which are approved by the Revenue Commissioners under section 72 of the Capital Acquisitions Tax Consolidation Act 2003. This legislation provides for a relief on the proceeds of certain life assurance policies used to pay inheritance tax. These policies are widely available in the market. They are generally whole-of-life assurance policies and will provide that the proceeds are tax free insofar as they are used to pay an inheritance tax bill.
For completeness, the Department also consulted with the Revenue Commissioners on the Senator's query as it may have inheritance tax law implications. As proposed by him, their view is nothing in CAT legislation prevents a child from taking out life cover in respect of his or her parents for the specific purpose of paying inheritance tax after the death of a parent or parents. However, the concept of insurable interest would be relevant as the child would have to prove to the insurance company that he or she has a financial necessity for such a policy. I recall that the principle of insurable interest in insurance legislation was recently modernised under the Consumer Insurance Contracts Act 2019. Accordingly, the introduction of this Act is a significant development in insurance law for consumers, which, among other things, reforms the contractual relationship between consumers and insurers.
In summary, I do not believe there is a need to examine the feasibility of changing legislation in this regard. It can be dealt with as proposed in the Senator's matter.
I thank the Minister of State for his reply. Perhaps the terms in which the matter was phrased were not specifically accurate enough to highlight the problem that I was speaking about.
I note that he said that there is not a problem in theory with a child of a likely disponer taking out a life assurance policy providing he or she can show an insurable interest but there is this difficulty of to whom the proceeds of that policy are paid. If they are paid to the inheritor, there are issues as to whether they form part of the estate and whether they can be separately made liable for taxation.
The second point that I raise with the Minister of State is it were possible for a section 72 insurance policy to be funded - it was made clear that it can be funded by a person who expects to inherit - without in any way vitiating the policy and without having to show insurable interest or whatever, it would be an evening up between the have-nots and the haves who can avail of section 72.
I thank the Senator for his remarks. I understand the issue of insurable interest is fundamental to every insurance policy and it is not easy to get over the situation of people taking out an insurance policy unless they can prove that they have interest in the policy. That is one issue.
I take on board the Senator's second point completely. If it is payable to the estate, I would be afraid and the Senator would be concerned that the Revenue would include it as part of the estate and subject to taxation as part of the estate. That would defeat the purpose to an extent. Second, it would not have to be paid by the beneficiaries of the estate. To that extent, it means that they would benefit to some extent, but I see the complications.
I have explained that the insurable sector currently provides options for people with regard to estate planning, including through section 72, and such cover may be expensive given that it is a whole-of-life type cover and insurers will price the risk accordingly.Nevertheless, there is no need to consider any amendments to either the insurance legislation or the tax code. It is not clear from the Commencement matter whether the Senator is suggesting insurance companies offering section 72 life insurance policies will allow the adult children to pay the premiums and therefore be considered the owners of the policy. The Senator has dealt with that in his comments in the meantime. The matter can only be dealt with in the next Finance Act.