ExpertHard2 marksMultiple Choice
ACCA · Question 27 · Inheritance tax
Section B - Case 3 (Oakfield Farms)
Four years before his death, Arthur transferred £400,000 cash into a discretionary trust. He had made no previous lifetime gifts. Arthur paid the lifetime Inheritance Tax arising on this transfer.
Assuming the nil rate band is £325,000, what was the lifetime IHT liability paid by Arthur?
Section B - Case 3 (Oakfield Farms)
Four years before his death, Arthur transferred £400,000 cash into a discretionary trust. He had made no previous lifetime gifts. Arthur paid the lifetime Inheritance Tax arising on this transfer.
Assuming the nil rate band is £325,000, what was the lifetime IHT liability paid by Arthur?
Answer options:
A.
£15,000
B.
£18,750
C.
£30,000
D.
£0
How to approach this question
Identify the transfer as a CLT. Deduct the NRB (£325k) from the transfer (£400k) to find the taxable amount (£75k). Since the donor pays the tax, use the grossing-up rate of 20/80 (25%).
Full Answer
B.£18,750✓ Correct
A transfer to a discretionary trust is a Chargeable Lifetime Transfer (CLT). The first £325,000 is covered by the Nil Rate Band (NRB). The excess is £400,000 - £325,000 = £75,000. Because Arthur (the donor) paid the tax, the lifetime rate is 20/80 (or 25%). The tax is £75,000 x 25% = £18,750.
Common mistakes
Using the 20% rate (which applies if the trust pays) instead of the 25% grossed-up rate when the donor pays.
Practice the full ACCA TX — Taxation Practice Exam 2
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