ACCA Applied Skills · Taxation (UK)

The basic principles of computing transfers of value: formula sheet

Full chapter guide

Key formulas

Transfer of value: Transfer of value = Value of donor's estate before − Value of donor's estate after; This is the loss to the donor. It is not the value received by the donor's recipient.
Scope of charge: UK domiciled: worldwide assets. Non-UK domiciled: UK situs assets only; Overseas assets of a non-UK domiciled person are excluded property.
Nil rate band: Nil rate band = £325,000; Figure given in the ACCA tax rates and allowances. Residence nil rate band is £175,000.
IHT rates on the excess: Lifetime rate 20%; death rate 40%; Applied to the value above the available nil rate band.
Taper relief on tax: Years before death: 3-4: 20%; 4-5: 40%; 5-6: 60%; 6-7: 80% reduction; Reduces the tax, not the value. It applies only where tax is payable on a gift made within seven years before death.
Transfer of value: Transfer of value = Value of donor's estate before − Value of donor's estate after; Both values are taken immediately before and after the gift. Do not use the recipient's gain.
Related property valuation: Value of donor's shares = Value of combined holding × (Donor's shares ÷ Combined shares of donor and related property); Use this to value the donor's own shares before the transfer. Value the combined holding (donor plus related property) as one block, then apportion it to the donor's shares by number of shares. Related property includes the spouse's or civil partner's property.
Associated costs: Total transfer of value = Fall in value of estate + Costs paid by donor; If the donor pays the costs of the gift, add them. If the recipient pays them, they are not added.
Lifetime IHT rate on excess over nil rate band: Lifetime rate 20%, death rate 40%, nil rate band £325,000; Given in the exam's tax rates. Needed once the transfer of value is found. The costs are included before tax is worked out.
Classification: Gift to an individual = PET; gift to a trust or a company = CLT (except bare trusts and certain disabled trusts, which are PETs); Check the recipient first. A bare trust or certain disabled trust is treated like a gift to an individual, so it is a PET. Apply exemptions before classifying.
PET tax consequence: No tax when made; chargeable only if donor dies within 7 years; If death is within 7 years, tax is at 40% on the excess over the nil rate band remaining, with taper relief on the tax.
CLT lifetime tax: Tax (trustees pay) = 20% × (CLT after exemptions − available nil rate band); Nil rate band is £325,000 less chargeable transfers in the previous 7 years. Use this formula only when the trustees pay the tax. If the donor pays, use the grossing up formula below.
Grossing up: Gross transfer = (net transfer − available nil rate band) ÷ 0.80 + available nil rate band; tax = 20% × grossed-up excess; Use only when the donor pays the lifetime tax. The tax works out at 25% of the net excess.
Taper relief: Reduces the tax (not the value) by 20% (3–4 yrs), 40% (4–5), 60% (5–6), 80% (6–7); No relief if death is within 3 years. The ACCA table gives these percentages.
Death rate: 40% on the excess over the nil rate band; Death within 7 years of a CLT: compute death tax at 40% on the gross transfer above the nil rate band remaining, reduce it by taper relief, then deduct lifetime tax paid (the result cannot be below nil).
Annual exemption: £3,000 per tax year, plus unused amount from the previous year only; The unused part of a year's exemption is carried forward one year only. It is used only after the following year's own exemption has been fully used.
Small gifts exemption: Gifts to any one person totalling up to £250 per tax year; If total gifts to that person in the tax year exceed £250, the small gifts exemption is lost for that person. The annual exemption can then be used instead.
Marriage gift exemption: Parent £5,000; grandparent or remoter ancestor £2,500; bride or groom to the other £2,500; anyone else £1,000; The gift must be made in consideration of the marriage.
Normal expenditure out of income: Exempt if: part of normal (habitual) pattern + paid out of income + donor's usual standard of living is maintained; No upper limit. Keep evidence of the pattern.
Spouse and charity: Unlimited exemption for gifts to a spouse/civil partner and to UK charities; Apply these first, before other exemptions.
Order of applying exemptions: Gifts in date order; for the annual exemption use current year first, then brought-forward; Where several gifts are made on the same day, share the exemption pro rata.
Nil rate band reminder: Nil rate band £325,000; lifetime rate 20%; death rate 40%; Exemptions reduce the gift before it is measured against the nil rate band.
Nil rate band available: £325,000 − gross CLTs in the 7 years before the gift; Use the gross amounts of earlier CLTs, including any tax the donor paid on them. Gifts older than 7 years are ignored.
Lifetime tax, donee pays: Tax = 20% × (CLT after exemptions − NRB available); No grossing up is needed because the donee bears the tax.
Lifetime tax, donor pays: Tax = 20/80 × (net CLT after exemptions − NRB available); Equivalent to 25% of the net excess. Only the excess over the NRB is grossed up.
Gross chargeable transfer: Net transfer + tax paid by donor; This is the figure that goes into cumulation for later gifts.
Check on a grossed-up answer: 20% × (gross transfer − NRB available) = tax; If this does not equal your tax, the gross-up is wrong.

Quick revision

IHT is charged on a transfer of value: a gift that reduces the donor's estate.
Value transferred is the loss to the donor, not the gain to the recipient.
A gift to an individual is normally a PET: no tax at the time of the gift.
A gift into a trust is normally a CLT: lifetime tax may be due immediately.
Nil rate band is £325,000; the lifetime rate is 20% on the excess.
If the donor pays the lifetime tax, gross up: the tax is 20/80 of the excess over the nil rate band.
The nil rate band is reduced by CLTs made in the previous seven years.
Exemptions are deducted from the transfer of value before the nil rate band is applied.
Use the annual exemption of the current year first, then any unused amount from the previous year.
Residence nil rate band of £175,000 applies to the death estate, not to lifetime computations.
Taper relief applies only to the tax on gifts made more than three years before death.

Common mistakes

Using the value received by the recipient as the transfer of value. Fix: Always compute the fall in the donor's estate. Compare before and after.
Taxing overseas assets of a non-UK domiciled person. Fix: Check domicile first. Non-UK domiciled means UK situs assets only.
Using the value of the asset received by the recipient as the transfer of value. Fix: Always do before minus after for the donor. The two figures may differ.
Ignoring the spouse's holding when valuing shares. Fix: For IHT valuation, combine the donor's property with related property before valuing. Check the spouse's holdings in the question.
Charging tax on a PET when it is made. Fix: Write 'PET: no lifetime tax' unless death within seven years is stated.
Treating all gifts into trusts as PETs. Fix: Check the recipient. A discretionary trust gives a CLT.
Carrying forward the annual exemption for more than one year. Fix: Carry forward to the next year only. If it is not used in that next year, it is lost.
Using the brought-forward exemption before the current year's exemption. Fix: Use the current year's £3,000 first, then the brought-forward amount.
Applying 20% to the net excess when the donor pays. Fix: Whenever the donor pays, multiply the net excess by 20/80. Then run the check: 20% of the gross excess must equal the tax.
Grossing up the whole gift instead of only the excess over the NRB. Fix: Subtract the NRB available first. Only the excess bears tax, so only the excess is grossed up.

Exam tips

In objective tests, read for the domicile status first. It often decides the answer.
Remember that the transfer of value is measured by the loss to the donor.
Learn the nil rate band, rates and taper relief percentages. They are given in the tax tables, but you need to know how to use them.
In written answers, label each stage: transfer, exemptions, nil rate band, tax. This earns method marks.
Do not mix up taper relief with a reduction in the value of the gift.
Write 'before' and 'after' on every question. It earns method marks in Section C and prevents errors in objective questions.
Read the question for the spouse or civil partner's holdings. Their mention usually signals related property.
Check who pays the costs. Only donor-paid costs increase the transfer.