If a non-spouse inherits the balance of an ARF from the deceased, how is the benefit 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 the beneficiary
• D. Taxed under PAYE at the beneficiary's marginal rate

Answer: (B)

When an ARF balance passes to a non-spouse, the payment isn’t treated as an inheritance for Capital Acquisitions Tax. Instead, it is taxed as income to the beneficiary, with a 30% income tax charge deducted at source from the payment. So the benefit is exempt from inheritance tax but subject to a 30% income tax charge. Capital gains tax doesn’t apply here, and the deduction isn’t simply PAYE at the marginal rate; the specific arrangement is a 30% withholding income tax on the ARF death benefit to a non-spouse.