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ACCA Strategic Professional · Advanced Taxation (UK) · Inheritance tax: the liabilities arising on chargeable lifetime transfers and on death

Alan made a chargeable lifetime transfer to a discretionary trust and the trustees pay the lifetime IHT. Alan then dies within seven years of the transfer. Which statement about the IHT on the transfer is correct, using the rates in the ATX-UK tax tables?

Lifetime tax is 20% on the excess over the nil rate band. If the donor dies within seven years it is recomputed at 40%, and taper relief reduces the tax only where death is more than three years after the transfer. Tax already paid is credited.

  1. AThe lifetime rate of 20% applies only to the excess over the available nil rate band, and on death within seven years the rate is recalculated at 40%, with taper relief available only if death occurs more than three years after the transferCorrect
  2. BThe transfer is taxed at 40% on the whole value from the outset
  3. CTax paid during lifetime is repaid in full if Alan dies within three years
  4. DTaper relief reduces the value transferred rather than the tax payable

Explanation

Lifetime tax on a chargeable transfer is 20% of the excess over the nil rate band. If the transferor dies within seven years, the tax is recomputed at the death rate of 40%. Taper relief (20% to 80%) reduces the tax only where death is more than three years after the transfer. It reduces the tax, not the value, and the lifetime tax already paid is credited rather than repaid.

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