An option available to you at retirement is to invest a portion of your pension funds into an Approved Retirement Fund. There is no doubt that investing in a ARF provides many benefits. However, is using it as an Inheritance Tool a benefit to all beneficiaries?
Dermot Staunton, one of our qualified financial advisors shares his thoughts on this topic.
Yes, but the relationship between the parties has a significant influence on the amount of Inheritance tax the beneficiary may end up paying. Hence, it requires prudent financial planning.
An Approved Retirement Fund (ARF) is a post retirement investment contract. This contract is used for the proceeds of retirement funds that are not taken in the form of a lump sum.
> Group A – €320,000:
Applies where the beneficiary is a child e.g. adopted child, stepchild, and certain foster children. Parents also fall within the threshold where they take an inheritance of an absolute interest from a child.
> Group B – €32,500:
Applies where the beneficiary is a brother, sister, niece, nephew, lineal ancestor or lineal descendants.
> Group C – €16,250:
Applies in all other cases.
It depends on your relationship with the owner of the ARF.
|Who inherits the ARF?||Income Tax||Inheritance Tax|
|Spouse or Civil Partner||No||No|
|Child under 21||No||Yes|
|Child over 21||Yes (subject to 30%)||No (and sum inherited not deducted from the Group A threshold)|
|Others||Yes (at deceased tax rate)||Yes|
Let’s take for example a spouse or a Civil Partner – there is no tax, whereas for children of the donor, the amount and type of tax paid depends on the age of the child.
In another circumstance, a nephew may receive the proceeds of an ARF from his late Uncle. This sum could be for €375,000, he would then be subject to the following taxes:
The €375,000 will be subject to Income Tax, PRSI, USC (assume 52%) so Net Inheritance is €180,000.
The taxes don’t end there. The nephew is also subject to Inheritance Tax.
After the above taxes have been deducted, the remaining funds are subject to Inheritance tax on €180,000, less the full amount of the Group B Threshold of €32,500 (assuming the nephew received no other inheritance from his Uncle in his lifetime), which is €147,500.
So, after paying Income Tax/PRSI/USC, the inheritance amount is reduced by €195,000 to €180,000.
Then, after allowing for relief of €32,500, tax (at current rate of 33%) on the €147,500 ( €180,000 – €32,500) is €48,675.
Subsequently, the total tax paid is€243,675 ( €195,000 + €48,675) which leaves a cash amount of €131,325 in the nephew’s bank account.
The result is that 65% of the initial inherited amount must be paid in taxes.
With careful financial planning in advance of retirement, the impact of taxation on the inheritance proceeds can be reduced.
If you wish to contact Dermot for financial advice, you can reach him in our Galway Office on 091 759500 or on his mobile at 086 8668988.
Alternatively, you can request a callback on our website today.