There are two ‘really clever ways’ to reduce an inheritance tax bill, a financial expert has advised. 

Currently, people pay Capital Acquisitions Tax (CAT) of 33% on all gifts or inheritances from their parents in excess of €400,000. 

If a person inherits money from a different relative or friend, CAT applies at a much lower threshold, either €40,000 or €20,000. 

However, on Lunchtime Live, Fairstone Ireland CEO Paul Merriman said people who think their loved ones will be slapped with a huge tax bill when they die, should consider giving away some of their fortune when they are alive. 

“You can use the small gift exemption, which is €3,000 a year to anyone,” he suggested. 

“So, if you have a large, if you have a number of children, you have in-laws as well, if you have grandchildren, you can start giving €3,000 per year to everyone.

“You have to be careful of that though, because it drains cashflow and it can do it quite quickly.”

Mr Merriman continued that a Section 72 life assurance policy, or ‘whole life policy’, is a Revenue approved way of reducing an inheritance tax bill. 

“That means when you pass away, the life assurance money will be paid out, but it doesn't form part of the estate because under what's called a Section 72 Act,” he explained. 

“That's a really clever way for people to fund, to pay the tax bill. 

“So, the parents will typically put it in place; it's on a joint life second basis.

“Say it was myself, my wife, Sarah, and we have got one; if I was to die first, nothing happens because Sarah gets the estate. 

“Then when Sarah passed away, it goes down to her four children.

“That's when the Section 72 policy would pay out and would help the kids either pay the inheritance tax or reduce the inheritance tax liability.” 

Mr Merriman added that anyone considering taking out a life assurance policy should take professional advice before they do so.

Main image: Hands of an elderly pensioner with a wallet open. Picture by: Alamy.com.