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

Omar settled £500,000 of cash into a discretionary trust on 1 June 2026, having made no earlier transfers. Ignoring annual exemptions, the donor pays the lifetime tax personally rather than the trustees. What is the lifetime inheritance tax payable by Omar?

The tax is £43,750. Because the donor pays, the net gift must be grossed up. The £175,000 excess over the £325,000 nil rate band is multiplied by 20/80, giving £43,750, rather than simply 20% of the excess.

  1. A£35,000
  2. B£43,750Correct
  3. C£87,500
  4. D£50,000

Explanation

The excess over the nil rate band is £500,000 - £325,000 = £175,000. When the donor pays the tax, the gift is grossed up: £175,000 x 20/80 = £43,750 tax. The £35,000 figure is wrong because it taxes the excess at 20% and ignores the gross-up, which is required when the donor pays.

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