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ACCA Strategic Professional · Advanced Taxation (UK) · Inheritance tax: transfers to and from trusts and property within trusts

Mia settled £400,000 of quoted shares into a discretionary trust in the current tax year. She had made no earlier transfers of value, and the trust will pay any inheritance tax due. Ignoring annual exemptions, what is the lifetime inheritance tax payable on the transfer?

The inheritance tax is £15,000. A transfer into a discretionary trust is chargeable immediately. The first £325,000 falls within the nil rate band, and the £75,000 excess is taxed at the 20% lifetime rate when the trustees pay the tax.

  1. A£15,000Correct
  2. B£75,000
  3. C£80,000
  4. D£0

Explanation

A transfer into a discretionary trust is a chargeable lifetime transfer. The nil rate band is £325,000, so the excess is £400,000 - £325,000 = £75,000. If the trustees pay the tax, the lifetime rate of 20% applies, giving £15,000. Taxing the whole £400,000 at 20% would give £80,000, which is wrong because the nil rate band is available.

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