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ACCA Applied Skills · Taxation (UK)

The Basic Principles of Computing Transfers of Value

A transfer of value is a gift that reduces the donor's estate. You compute it as the fall in value of the donor's estate (loss to the donor), not the gain to the recipient. Deduct exemptions, then treat it as a PET or CLT. Tax only arises on a CLT above the nil rate band.

What this chapter covers

This chapter introduces inheritance tax (IHT) on lifetime gifts. It starts with who is chargeable and what counts as a transfer of value. It then splits gifts into potentially exempt transfers (PETs) and chargeable lifetime transfers (CLTs), applies exemptions, and ends with computing lifetime tax using the nil rate band.

The central idea is the loss to the donor principle. IHT looks at how much the donor's estate falls, not at what the recipient receives. The two figures differ when the donor pays the tax, when assets are connected, or when a gift of part of a holding drops the value of what is left. Get this figure wrong and every later step is wrong.

This chapter is the base for the next IHT chapters: the death estate, the effect of death on earlier gifts, taper relief and the death rate. It also sits beside income tax, capital gains tax and corporation tax. A gift of a business asset can trigger both IHT and CGT, so you must keep the two computations separate.

IHT appears in the objective test questions in Sections A and B and can also feature in a constructed response question. Objective questions are all or nothing, so you need exact rules, such as which gifts are PETs and which are CLTs, and the correct order of exemptions. The computations are short and mechanical, so careful students can score full marks. The same skills carry directly into the death computations, which makes this chapter worth the effort.

The basic principles of computing transfers of value: topics in the order to study them

  1. 1Inheritance Tax Basics and Chargeable PersonsYou need to know what IHT taxes, who can be chargeable and how it links to domicile before looking at any gift.
  2. 2Transfers of Value and Loss to the Donor PrincipleEvery computation starts with the fall in the donor's estate, so master this figure before classifying gifts.
  3. 3Potentially Exempt Transfers and Chargeable Lifetime TransfersThe type of gift decides whether tax is due now, later or never, so classify before you apply reliefs.
  4. 4Exemptions and Reliefs for Lifetime GiftsExemptions reduce the transfer of value before the nil rate band is used, so learn them once the gift types are clear.
  5. 5Nil Rate Band and Computing Lifetime TaxThis pulls everything together: net transfer, cumulative nil rate band and the lifetime tax rate.

How to prepare The basic principles of computing transfers of value

Treat this chapter as a fixed sequence. Build the layout first, then practise it until the order of steps is automatic.

  1. Learn the layout: value of estate before, value after, loss to donor, then exemptions, then PET or CLT.
  2. Memorise the rates and bands given in the exam: nil rate band £325,000, lifetime rate 20% and death rate 40%. Know that the residence nil rate band of £175,000 is for the death estate, not lifetime gifts.
  3. Practise the order of exemptions: annual exemption first, using the current year then any unused amount from the previous year, after other exemptions such as marriage or small gifts as the question requires.
  4. Do a set of short objective questions on classifying gifts: gifts to individuals are usually PETs, gifts into most trusts are CLTs.
  5. Compute lifetime tax on CLTs, including the 20% rate on the excess over the nil rate band remaining. Practise the grossing-up case where the donor pays the tax, so the tax is 20/80 of the excess.
  6. Check the seven-year cumulation: add up CLTs in the seven years before the gift to find the nil rate band used.
  7. Finish with mixed timed questions and write out full workings for a constructed response answer.

Common mistakes in The basic principles of computing transfers of value

  • Using the value received by the recipient instead of the fall in the donor's estate.

    Fix: Always write estate before and estate after, then take the difference.

  • Deducting exemptions in the wrong order or twice.

    Fix: Use a fixed layout with columns for the current and previous tax year and tick off what is used.

  • Treating every gift as chargeable now.

    Fix: Ask who receives the gift. An individual means a PET, a trust usually means a CLT. Only CLTs produce tax at the time.

  • Forgetting to gross up when the donor pays the lifetime tax.

    Fix: If the donor pays, the gift is net. Apply 20/80 to the excess over the available nil rate band.

  • Ignoring earlier CLTs when finding the nil rate band available.

    Fix: Look back seven years before the gift and deduct the CLTs, after their exemptions, from the nil rate band.

  • Applying the residence nil rate band to lifetime gifts.

    Fix: Remember that the residence nil rate band relates to the home passing on death, not to lifetime transfers.

Last-day revision: The basic principles of computing transfers of value

  • 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.

The basic principles of computing transfers of value practice questions

The basic principles of computing transfers of value in other exams

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

The basic principles of computing transfers of value: frequently asked questions

What is the loss to the donor principle?

IHT measures a transfer by how much the donor's estate falls because of the gift. It does not measure what the recipient receives. The two can differ, for example when the donor pays the tax or gives away part of a larger holding.

What is the difference between a PET and a CLT?

A PET is a gift to an individual and does not create tax at the time. It becomes chargeable only if the donor dies within seven years. A CLT is usually a gift into a trust and may create lifetime tax at once if it exceeds the available nil rate band.

What lifetime IHT rate do I use in TX-UK?

The lifetime rate is 20% on the excess over the nil rate band of £325,000. These figures are given in the tax rates and allowances in the exam. If the donor pays the tax, you gross up the excess by using 20/80.

Do I need to learn taper relief in this chapter?

Not for lifetime computations. Taper relief reduces tax on gifts made more than three years before death, so it belongs with the death computations. You still need to know how it links to the PETs and CLTs you classify here.