Changes to Exit Tax for policies sold after 1/1/2001

Irish tax is payable on any investment returns made on a life insurance policy. Tax is paid at the rate which applies for customers of life insurance companies (currently 23%). This tax rate is equal to the standard rate of income tax (currently 20%) plus 3%. Where the charge applies, the life insurance company deducts any tax due from the value of the policyholder’s investment and pays it to the Irish Revenue. The life insurance company then pays the policyholder the after tax amount.

So what has changed?

Before the new tax rules came into effect, Irish tax was payable on investment returns:
· if the policyholder made a withdrawal (full or partial) from their investment;
· if the policyholder took an income from their investment;
· if the death benefit was paid;
· if the policyholder transferred all or part of their investment to somebody else (although there were some exceptions to this).

After the new rules came into effect, Irish tax is now payable in all of the above circumstances and on every eighth anniversary of the policy.

This means that, from now on, tax will automatically be deducted from the value of the policy on each eighth anniversary. The tax paid on each eighth anniversary will reduce the amount invested in the fund from that date onwards.

Where tax is deducted from the policyholder’s fund on each eighth anniversary, this tax can be offset against any tax that is payable on a subsequent full encashment. Therefore if the policyholder decided to cash in their investment on, say, the ninth anniversary then the amount of tax due, based on investment returns over the nine years, would be reduced by the amount of tax they already automatically paid on the eighth anniversary.

The new rules affect all categories of life insurance, including savings, investment and linked protection.

These changes were brought into law as part of the 2006 Finance Act. They apply to all policies sold on or after January 1st 2001. This means that the first actual deduction of tax won’t take place until January 1st 2009.