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ACCA Strategic Professional · Advanced Taxation (UK) · Inheritance tax: the scope of inheritance tax

Priya made a gift of £50,000 cash to her adult son in June 2024. She is UK domiciled and the gift was not covered by any exemption. Which statement correctly describes the inheritance tax (IHT) treatment of the gift at the date it is made?

A gift of cash from one individual to another is a potentially exempt transfer. No inheritance tax arises when it is made. It becomes chargeable only if the donor dies within seven years. Gifts to individuals are not immediately chargeable at the 20% lifetime rate.

  1. AIt is a chargeable lifetime transfer taxed immediately at the lifetime rate of 20% above the nil rate band
  2. BIt is a potentially exempt transfer (PET), so no IHT is due when it is made and it becomes chargeable only if Priya dies within seven yearsCorrect
  3. CIt is an exempt transfer because the recipient is a close relative
  4. DIt is a PET that becomes exempt after three years, when taper relief eliminates any charge

Explanation

A gift by an individual to another individual is a PET. No tax is payable at the time, and it becomes chargeable only if the donor dies within seven years. A lifetime charge at 20% applies to gifts into most trusts, not to gifts to individuals. Taper relief only reduces the tax and never makes the transfer exempt within seven years.

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