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

Mehmet made a gift of £500,000 to a discretionary trust and paid the lifetime inheritance tax himself. He died 4 years and 6 months later. Which statement about the additional inheritance tax on his death is correct?

Taper relief of 40% reduces the death-rate tax on the gift, because death occurred between 4 and 5 years after it. It is applied to the tax, not the value, and the lifetime tax already paid is deducted, with no repayment if that exceeds the recalculated tax.

  1. ADeath rate of 40% applies to the gift in full with no taper relief, because the gift was chargeable
  2. BTaper relief of 40% reduces the tax calculated at the death rate of 40%, and the lifetime tax already paid is then credited against the resultCorrect
  3. CTaper relief of 40% reduces the value of the gift before the nil rate band is applied
  4. DTaper relief of 60% applies because the gift was made more than 4 years before death

Explanation

Death within 7 years of a chargeable lifetime transfer means tax is recomputed at the 40% death rate. Taper relief reduces that tax, not the value transferred. For a gift between 4 and 5 years before death the reduction is 40%. The lifetime tax paid is credited, but no refund is given if it was higher.

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