Pensions and inheritance tax, explained
A pension can be one of the biggest things a farmer leaves behind, but it isn't taxed like the farm. Who gets it, and their age, decides whether it's inheritance tax, income tax, or neither. And your own pension is left out of the 80% farmer test.
In short
- A pension fund you can't draw yet is left out of your 80% farmer test.
- Pension money already paid out to you counts, like any other savings.
- An ARF left to a spouse or civil partner: no inheritance tax.
- Left to a son or daughter aged 21 or over: no inheritance tax, but 30% income tax. It doesn't use up any of their tax-free threshold.
- Left to anyone else: inheritance tax, and for most, income tax as well.
Your own pension and the 80% farmer test
To get agricultural relief, farm property must be at least 80% of everything you own on the valuation date, once you've inherited. Revenue accepts that a future entitlement to a pension fund doesn't need to be included, so a pension you're still paying into, or can't draw yet, stays out of the sum.
Money that has already come out of a pension is different. A tax-free lump sum sitting in your bank account counts as savings. An ARF you already have is less clear-cut, because you can draw on it at any time: ask your adviser how it should be treated.
A pension left by the person who died
When someone dies with money in an Approved Retirement Fund (ARF), or a PRSA they've started drawing from, it passes under their will. It isn't taxed like the farm. Who gets it, and their age, decides the tax:
| Who gets it | Inheritance tax (CAT) | Income tax |
|---|---|---|
| Spouse or civil partner | None | None when it moves into their own ARF. They pay income tax as they draw it. |
| Son or daughter, 21 or over | None | A flat 30%, taken before it's paid out |
| Son or daughter, under 21 | Yes, against their Group A threshold | None |
| Anyone else, such as a nephew or niece | Yes, on what's left after income tax, against their own threshold | Taxed as the income of the person who died, in the year they died |
Favourite nephew or niece relief covers the farm, not the pension. A nephew or niece who qualifies gets the Group A threshold on the farm, but the pension is taxed against the Group B threshold of €44,000.
Example
| Who | Seán, 38, inherits his mother's farm and her ARF of €200,000 |
|---|---|
| Income tax on the ARF | 30%: €60,000. Seán receives €140,000. |
| Inheritance tax on the ARF | None, and his €420,000 Group A threshold is untouched for the farm |
If the €140,000 is in Seán's account on the farm's valuation date, it counts as his savings in the 80% farmer test. For a smaller farm, that can be the difference between passing and failing.
Death-in-service lump sums
If someone dies before retiring, their employer's pension scheme may pay a lump sum. Revenue charges inheritance tax on benefits paid to you from another person's pension scheme. A spouse or civil partner pays none. Anyone else, including a son or daughter of any age, counts it against their tax-free threshold, the same as an inheritance.
Pensions and the Kinacre calculator
The calculator works out the tax on the farm. It doesn't ask about pensions, and for most families it doesn't need to:
- A pension going to a spouse, or to a son or daughter aged 21 or over, doesn't change the tax on the farm. Leave it out.
- Pension money that will be in your account on the valuation date goes under savings, on the "What you already own" step.
- If a pension or lump sum goes to someone who pays inheritance tax on it, and it falls in the same group as the farm, add the amount they're taxed on to "Earlier gifts and inheritances". That shows how much of their threshold it uses up.
Common questions
Does my pension count in the 80% farmer test?
A pension fund you can't draw yet is left out. Money already paid out of a pension counts, like any other savings.
Is an ARF left to a son or daughter taxed?
If they're 21 or over, there's no inheritance tax but 30% income tax is taken before it's paid out. If they're under 21, it's taxed as an inheritance against their Group A threshold.
Does favourite nephew or niece relief cover a pension?
No. It covers the farm. A pension left to a nephew or niece is taxed against the Group B threshold of €44,000.
See what the reliefs would mean for your own farm. It takes about five minutes, and your answers stay on your phone.