Andrew died in 2012 and the balance of his ARF was transferred to an ARF owned by his surviving spouse, Sarah. If Sarah dies now in 2020 and leaves the balance of her ARF to her son, Tom, aged 32, how will this benefit be taxed?

• A. Subject to capital gains tax at 33% at source
• B. Exempt from inheritance tax but subject to a 30% income tax charge
• C. Exempt from income tax but a taxable inheritance for inheritance tax purposes for Tom
• D. Taxed under PAYE at Sarah's marginal rate of income tax in the year of death

Answer: (B)

When a pension fund like an ARF is paid to a non-spouse on death, it’s treated as a pension death benefit rather than a normal inheritance asset. This means it is not subject to inheritance tax (CAT). Instead, there is an income tax charge of 30% on the value of the benefit. The administrator typically withholds 30% at source, so the beneficiary would receive 70% of the ARF balance, with 30% paid to Revenue. In this case, Tom would inherit the ARF balance free of inheritance tax, but 30% would be charged as income tax on the benefit.