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ACCA Applied Skills · Taxation (UK) · The overall function and purpose of taxation in a modern economy

Under inheritance tax, the lifetime rate on the excess over the nil rate band is 20% while the death rate is 40%. Peter made a chargeable lifetime transfer, with the nil rate band already used, on which lifetime tax of £20,000 was paid on a gross transfer. He died 5 years and 6 months later. Using the death rate and taper relief from the tax tables, what is the death tax payable on that transfer, before deducting the lifetime tax paid (assume the gross transfer is £100,000 and the nil rate band is fully used by earlier transfers)?

Death tax on the £100,000 transfer is 40% x £100,000 = £40,000. Death between five and six years later gives 60% taper relief, so the tax is £40,000 x 40% = £16,000, before considering lifetime tax credit.

  1. A£16,000Correct
  2. B£40,000
  3. C£24,000
  4. D£4,000

Explanation

Death tax is 40% x £100,000 = £40,000. The transfer is more than 5 but less than 6 years before death, so taper relief is 60%, leaving 40% of £40,000 = £16,000. The lifetime tax of £20,000 exceeds this, but no refund is given, and the question asks for death tax before that deduction.

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