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ACCA Applied Skills · Taxation (UK) · The liabilities arising on chargeable lifetime transfers and on the death of an individual

Mira made a chargeable lifetime transfer to a discretionary trust on 1 June 2025. She had made no earlier transfers. The transfer was £425,000 after exemptions, and Mira (not the trust) paid the lifetime tax. What is the lifetime inheritance tax payable by Mira?

The tax is £25,000. Because Mira pays the tax herself, the net excess over the £325,000 nil rate band, £100,000, is grossed up. Tax is £100,000 x 20/80, which equals £25,000. Applying 20% directly would understate the tax.

  1. A£20,000Correct
  2. B£25,000
  3. C£17,000
  4. D£85,000

Explanation

When the donor pays, the net transfer must be grossed up. The excess over the nil rate band of £325,000 is £100,000 net, grossed up at 20/80 to £125,000... so tax is £25,000 (100,000 x 20/80). The £20,000 option wrongly applies 20% to the net excess without grossing up.

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