The Varying Tax Treatments of ARFs on Death

When it comes to the taxes paid from your ARF on your death, it very much depends on who you leave it to. There is quite the variance.

Spouse

If you leave your ARF to your spouse on death, it simply becomes an ARF in their name. Some companies just change the name on the existing ARF while others set up a new policy and transfer the value across. There is no CAT between spouses but any withdrawals are subject to taxation under the PAYE system, the same as your own withdrawals were.

Adult children who are age 21 years or over

If your ARF is left to your children and they are age 21 or over, the value of the ARF is subject to a flat income tax at a rate of 30%. This will be deducted by the provider and the remaining 70% is paid to the estate. The amount paid over is not subject to CAT.

Children under 21 years of age

If the children receiving the value of the ARF are under the age of 21, the value of the ARF is not subject to the flat income tax rate. It is subject to CAT though. Children can receive up to €400,000 tax free under the CAT thresholds, so they may get some/ all of the value of the ARF tax free depending on the value of any other assets they may receive.

Anybody else

If you leave the value of your ARF to anybody else, it is treated as a distribution from the ARF and it is subject to taxation under the PAYE system. This is likely to amount to 40% income tax with up to 8% USC. If you died before drawing down the State pension, it will also be subject to PRSI at 4.2%.

After that amount is paid out, the remainder is taxed under CAT. The tax free threshold for family members is €40,000 and €20,000 for anyone else with the tax rate at 33%.

Assume an ARF valued at €300,000 is left to a nephew. No PRSI is payable.

Value: €300,000
Taxation: €127,000
Net amount to estate: €173,000
Exempt: €40,000
Subject to CAT: €133,000
CAT: €43,890
Total tax: €170,890
Net paid: €129,110
That is an effective tax rate of 57% on the ARF going to a family member.

If you are leaving assets to other family members and your ARF is one of them, it makes a big difference regarding taxation on who gets it, so it is no harm in leaving direction in your will on which assets are allocated to who.