Taxation of Imputed Distribution after death of ARF holder

[waom]

Chapter 23 of the Revenue Tax and Pensions Manual states "Any payment, or imputed payment, from an ARF following the death of the ARF owner is a distribution and is taxable as such. The amount of the distribution is treated as income of the ARF owner for the year of assessment in which he or she dies."

Does this mean that if an ARF holder (age 65) draws down their ARF on a monthly basis (aiming to hit 4% annually) and dies in say January, that the Revenue will assess tax on an imputed distribution of 4% for the year (calculation based on 4% of value of ARF less any amount drawn down before date of death), which will be payable by the estate?

This sounds very unfair and would suggest that ARF holders should consider taking their annual ARF draw-down in one single payment in January of each year rather than in equal monthly drawdowns. The tax on the imputed distributions would more than offset the impact of the investment risk associated with a single ARD drawdown at the start of the year

 

[ClubMan]

Doesn't this...

The amount of the distribution is treated as income of the ARF owner for the year of assessment in which he or she dies."

contradict this?

which will be payable by the estate?

I.e. the tax manual is saying that the deceased is assessable while you're asking if the estate is assessable?

would suggest that ARF holders should consider taking their annual ARF draw-down in one single payment in January of each year rather than in equal monthly drawdowns.

How would that make any difference if the, say, 4% taken for the year (either monthly or in one payment in January) is all assessable under the individual's income tax return whether or not they die during the year?

 

[waom]

Hi Clubman,

1. I don't see a contradiction: the tax manual is saying that the deceased is assessable which means that, after the death of the tax payer, the liability will have to be settled by the estate of the deceased.
2. The tax on the imputed 4% distribution will result in the deceased having a tax liability despite not having received the income. If the ARF passes to the spouse of the deceased who still needs an income of 4% of the ARF for that year, then both the deceased and the spouse of the deceased will both have paid tax on a combined 8% of the value of the ARF, despite the fact the combined income drawn by both will only be 4% of the ARF.

 

[ClubMan]

If the ARF passes to the spouse of the deceased who still needs an income of 4% of the ARF for that year, then both the deceased and the spouse of the deceased will both have paid tax on a combined 8% of the value of the ARF, despite the fact the combined income drawn by both will only be 4% of the ARF.

I don't get this. Surely the 4% is just taken by the ARF owner and if they die then it simply passes to the spouse? I don't see how any "double taxation" arises?

 

[waom]

Hi Clubman, there is no issue if the deceased passes away at the end of the year, as they will have taken a 4% distribution from the ARF. The problem arises if the deceased passes away before receiving the 4% distribution, which results in Revenue imputing a 4% distribution by the ARF and thereby giving rise to a tax liability on this, despite the income not being received.

 

[S class]

If the ARF is left running until the end of the year the holder dies, the monthly drawdowns will be taxed at source and the remainder can be put into the estate. This should be no different than dividends, rental income, or deposit interest received in the year of death.

 

[waom]

Thanks S class. Allowing the ARF to run would resolve the issue. Unfortunately, one of the first things a solicitor will do is close bank accounts of the deceased and notify pension providers. Having reflected on this issue, I think I will withdraw my ARF in a lump sum at the start of the year to ensure no double tax in year of death.

 

[S class]

A person does not necessarily need to involve a solicitor immediately. They could delay until the 4% drawdown level is reached.

You could check with your ARF provider to see if the drawdowns are allowed to continue after death. An ARF is not the same as an Occupational pension or an Annuity because the funds are owned by the holder.

 

[Steven Barrett]

Does this mean that if an ARF holder (age 65) draws down their ARF on a monthly basis (aiming to hit 4% annually) and dies in say January, that the Revenue will assess tax on an imputed distribution of 4% for the year (calculation based on 4% of value of ARF less any amount drawn down before date of death), which will be payable by the estate?

No.

All they are saying is that any payment out of the ARF after the death of the policyholder is still liable to taxation under PAYE. It is quite common for payments to continue to be paid after their death as the death cert hasn't been submitted to the life company.

Once the policyholder dies, imputed distribution ceases too i.e. there is no longer an obligation to pay out 4%/5% of the value of the estate.

 

[LDFerguson]

+1

In a perfect world, if an ARF holder is receiving their 4% income from an ARF, as soon as they die, the ARF provider should be notified and they would immediately stop the monthly payments. The balance of the remaining ARF would then be administered as a death claim.

But it's not a perfect world. It could be months before the grieving widow/er / family member / solicitor gets around to notifying the ARF provider that the person has died. During that period, several months of payments may have been made, with tax deducted by the ARF provider and possibly already remitted to Revenue. Rather than attempt to put the toothpaste back in the tube by reversing all the payments and taxes, this provision simplifies such a "run-on" for a short period.

 

[waom]

Thanks for all the comments and to Steven Barrett for clarifying that once the policyholder dies, imputed distribution ceases too. I am still slightly puzzled by the reference in the Revenue Tax & Pensions Manual to "imputed payment from an ARF following the death of the ARF owner" and what this might be. I guess it could be referring to an imputed payment relating to the year prior to death, which would be payable by the ARF provider from the ARF in the year of death.