Qualified Financial Adviser (QFA) Pensions Exam 2 Practice Test

Which statement best reflects the tax treatment of ARF inheritance by a non-spouse, based on the material provided?

Subject to capital gains tax at 33% at source Exempt from inheritance tax but subject to a 30% income tax charge Exempt from income tax but a taxable inheritance for inheritance tax purposes Taxed under PAYE at the inheritor's marginal rate

Correct Answer:

Exempt from inheritance tax but subject to a 30% income tax charge

Explanation:

The key idea is how ARF benefits are taxed when they pass to someone who isn’t a spouse. For ARFs, the death benefit paid to a non-spouse isn’t charged as inheritance tax (CAT). Instead, the value of the inherited ARF is treated as income, triggering a 30% income tax charge on that amount. This charge is typically deducted at source by the fund administrator. So this treatment means the beneficiary doesn’t pay CAT on the ARF, but they do face a 30% income tax bill on the inherited amount. The other options don’t fit because capital gains tax isn’t applied here, PAYE at the beneficiary’s marginal rate isn’t the mechanism, and it isn’t taxed as CAT or exempt from income tax in the way those alternatives suggest.

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