ACCA Applied Skills · Taxation (UK)

Payment of Inheritance Tax for ACCA TX-UK

Payment of inheritance tax covers when tax is due, who must pay it, how much is payable and what happens if it is late. You work out the tax using the nil rate band and the 20% lifetime or 40% death rate. Then you apply the due date, the person liable, any instalment option and interest.

What this chapter covers

This chapter comes after you have learned how to value transfers and apply exemptions and reliefs. Here you turn a chargeable amount into a tax bill, and you decide who pays it and by when.

The chapter has five linked parts. You need the due dates, the persons liable, the tax calculation on lifetime transfers and on death, the instalment option and the interest and penalty rules. Questions often mix them in one short scenario, for example a gift to a trust followed by death four years later.

It links to the rest of the paper in two ways. The calculation uses the nil rate band, the residence nil rate band and the rates in the tax tables ACCA gives you. The due-date and interest rules also sit alongside the penalty and interest rules in other taxes. Objective test questions on this chapter are common, and a Section C question may ask for a calculation plus a short explanation.

Inheritance tax questions are mostly rule-based, so you can gain marks reliably if you learn the rules precisely. Objective test questions are marked all or nothing, so a wrong due date or the wrong person liable loses the full two marks. The calculation steps, such as grossing up, taper relief and credit for earlier tax, are also easy to practise and repeat. Because the rates and bands are given in the exam, your effort should go into method and timing rules, not memorising numbers.

Payment of inheritance tax: topics in the order to study them

1Calculating Tax Payable on Lifetime Transfers and DeathStart with the calculation, because every other topic in the chapter depends on knowing how much tax is due.
2Due Dates for Payment of Inheritance TaxOnce you can find the tax, learn when it falls due for lifetime transfers, additional tax on death and the death estate.
3Who Is Liable to Pay Inheritance TaxLiability depends on the type of transfer and on whether the tax is lifetime or arises on death, so it follows the calculation and the dates.
4Payment by InstalmentsThis option applies only to certain assets, so you need the earlier topics first to know when it is available.
5Interest and Penalties on Late Inheritance TaxFinish with the consequences of paying after the due date, which build directly on the due dates and the instalment rules.

How to prepare Payment of inheritance tax

Treat this chapter as a short set of rules plus one calculation method. Practise the method until it is automatic, then drill the dates and liability rules.

Write out the calculation layout for a lifetime transfer: value transferred, less exemptions, less nil rate band remaining after the previous seven years, then tax at 20% or at 20/80 of the net amount if the donor pays.
Practise the death calculation for a lifetime transfer made within seven years of death in this order. First work out the death tax at 40% on the transfer above the available nil rate band. Then reduce that tax by taper relief, using the table ACCA gives you. Then deduct lifetime tax already paid. The result cannot be below zero. Taper relief applies only to the tax on the lifetime transfer, never to the tax on the death estate.
Make a one-page timeline of due dates: lifetime transfers made between 6 April and 30 September (due 30 April in the tax year after the year of the transfer), lifetime transfers made between 1 October and 5 April (six months after the end of the month of the transfer), and tax arising on death (six months after the end of the month of death).
Build a table of who pays: the donor, the donee or trustees, and the personal representatives, for each type of tax.
Learn which assets qualify for instalments (land and buildings, controlling shareholdings, unquoted shares meeting the conditions, and business property) and that the tax is paid in ten equal yearly instalments. Then learn that interest on instalments depends on the asset: some qualify for interest-free instalments, while for others interest is charged on the whole outstanding balance. Practise short questions that ask whether instalments are available and whether interest runs.
Use the interest rates ACCA gives you to calculate interest on late tax for a given number of months, then finish with mixed objective test questions and one timed Section C style question.

Common mistakes in Payment of inheritance tax

Forgetting to gross up when the donor pays the lifetime tax.
Fix: Always read who pays. If the donor pays, the tax is 20/80 of the net chargeable amount after the nil rate band. If the donee pays, it is 20% of the excess.
Applying taper relief to the value of the gift instead of the tax, or applying it to the death estate.
Fix: For a lifetime transfer made within seven years of death, work out the death tax first at 40% on the part above the available nil rate band. Reduce that tax by the taper percentage. Then deduct lifetime tax paid, but not below zero. The death estate gets no taper relief.
Using the wrong due date for lifetime transfers.
Fix: Check the transfer date. For a transfer between 6 April and 30 September, the due date is 30 April in the following tax year. For a transfer between 1 October and 5 April, the due date is six months after the end of the month of the transfer.
Naming the wrong person as liable.
Fix: Link each type of tax to the person liable in a table. Lifetime tax is payable by the donor, or by the donee or trustees if the donor does not pay. Additional tax on death is paid by the donee for a PET and by the trustees for a CLT, with the donee or the donor's personal representatives liable only in limited cases. The personal representatives pay the tax on the death estate.
Assuming all assets can be paid by instalments, or that every instalment is interest-free.
Fix: Check the asset. Instalments are for land and buildings, controlling shareholdings, unquoted shares meeting the conditions, and business property. Cash and quoted shares that do not give control do not qualify. Then check interest: some assets have interest-free instalments, but for others interest is charged on the whole outstanding balance.
Counting interest from the wrong date or at the wrong rate.
Fix: Start interest from the due date, not the transfer date. Use the interest rate on underpaid tax given in the exam tables.

Last-day revision: Payment of inheritance tax

Nil rate band is £325,000 and the residence nil rate band is up to £175,000, both given in the exam tax tables.
The lifetime rate is 20% and the death rate is 40%.
If the donor pays the lifetime tax, gross up the net chargeable amount: tax = net amount × 20/80.
Taper relief reduces the tax, not the value transferred, for transfers made more than three years before death.
Taper relief percentages are 20%, 40%, 60% and 80% for 3-4, 4-5, 5-6 and 6-7 years before death.
For a lifetime transfer within seven years of death, work out death tax at 40% on the transfer above the available nil rate band, reduce it by taper relief, then deduct lifetime tax paid. The result cannot go below zero, and nothing is refunded if the lifetime tax was higher. The death estate gets no taper relief.
Lifetime transfers made 6 April to 30 September are due by 30 April in the tax year following the year of the transfer.
Lifetime transfers made 1 October to 5 April are due six months after the end of the month of the transfer.
Tax arising because of death is due six months after the end of the month of death.
Personal representatives pay the tax on the death estate. Additional tax on death on a PET is paid by the donee. On a CLT it is paid by the trustees, and the donee or the donor's personal representatives are liable only in limited cases.
Instalments (ten equal yearly instalments) are available for land and buildings, controlling shareholdings, unquoted shares meeting the conditions, and business property. Some of these carry interest-free instalments, while for others interest is charged on the whole outstanding balance, so check each asset.
Interest on underpaid tax is 8·50% in the exam tables, and overpaid tax earns 3·50%.

Payment of inheritance tax practice questions

Payment of inheritance tax in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Payment of inheritance tax: frequently asked questions

When is inheritance tax due on a lifetime transfer?

For a chargeable lifetime transfer made between 6 April and 30 September, tax is due by 30 April in the tax year following the year of the transfer. For a transfer made between 1 October and 5 April, it is due six months after the end of the month of the transfer.

Who pays inheritance tax on the death estate?

The personal representatives pay the tax on the death estate out of the estate. Additional tax on death on earlier lifetime gifts is different. The donee pays it for a PET, and the trustees pay it for a CLT, with the donee or the donor's personal representatives liable only in limited cases. Lifetime tax itself is payable by the donor, or by the donee or trustees if the donor does not pay.

Can inheritance tax be paid in instalments?

Yes, but only for certain assets: land and buildings, controlling shareholdings, unquoted shares meeting the conditions, and business property. The tax is paid in ten equal yearly instalments. Some assets have interest-free instalments, but for others interest is charged on the whole outstanding balance. Check each asset in the question before you apply the option.

What interest rate applies to late inheritance tax in TX-UK?

Use the rate on underpaid tax given in the exam tax tables, which is 8·50%. Interest runs from the due date until the tax is paid. Read the question for the number of months late.

Do I need to memorise the nil rate band and tax rates?

No. ACCA gives you the nil rate band, the residence nil rate band, the lifetime and death rates and the taper relief table. You still need to know how and when to use them, so practise the method.