ExpertMinds LogoExpertMinds
Medium25 marksExtended Response
Wealth Transfer and Trust TaxationInheritance TaxCapital Gains TaxTrustsAPR

ACCA · Question 02 · Wealth Transfer and Trust Taxation

SECTION B: ADVISORY REPORT 1

This question is worth 25 marks.

You are a tax advisor. Your client, Arthur (aged 75), owns 'The Blackwood Estate', a 500-acre working farm in the UK. Arthur is planning his estate and wishes to transfer wealth to his family while minimizing tax liabilities.

Exhibit 1: Transfer of the Farm
Arthur intends to gift the entire farming business, including the land, farm buildings, and machinery, to his daughter, Beatrice. Arthur has owned and actively farmed the land for 30 years. The current market value of the farm is £4.2 million, with an original cost of £800,000.

Exhibit 2: Discretionary Trust
Arthur also owns a portfolio of residential investment properties valued at £1.5 million (original cost £900,000). He wishes to transfer these properties into a Discretionary Trust for the benefit of his four grandchildren. Arthur has not made any previous lifetime transfers.

Requirements:
Prepare a memorandum for Arthur which:
(a) Advises on the Inheritance Tax (IHT) and Capital Gains Tax (CGT) implications of gifting the farm to Beatrice, specifically detailing the availability of Agricultural Property Relief (APR), Business Property Relief (BPR), and CGT Gift Hold-Over Relief. (15 marks)
(b) Explains the immediate IHT and CGT consequences of transferring the residential investment properties into the Discretionary Trust, and outlines any ongoing IHT charges (principal and exit charges) the trust may face. (10 marks)

How to approach this question

Structure as a memorandum. For part (a), separate IHT and CGT. Identify the PET, then apply APR to the agricultural value and BPR to the machinery/excess value. For CGT, identify the market value rule for connected persons and apply s.165 hold-over relief. For part (b), identify the CLT. Calculate the excess over the NRB and state the 20%/25% rates. Mention 10-year and exit charges. For CGT, link the CLT status to the availability of s.260 hold-over relief.

Full Answer

Farming businesses benefit from a combination of APR (on the agricultural value of land/buildings) and BPR (on machinery and any business value exceeding agricultural value). Gifts to individuals are PETs. Gifts to discretionary trusts are CLTs, triggering an immediate 20% IHT charge on amounts above the Nil Rate Band. Crucially, because a CLT is immediately chargeable to IHT, it qualifies for s.260 CGT hold-over relief, even though investment properties do not normally qualify for business asset hold-over relief (s.165).

Common mistakes

Students often confuse s.165 (business assets) and s.260 (chargeable transfers) hold-over reliefs. Investment properties do NOT qualify for s.165, but because they are going into a discretionary trust (a CLT), s.260 applies. Another error is forgetting that APR only covers agricultural value, requiring BPR for the remainder.
01All questions03

Practice the full ACCA ATX — Advanced Taxation Practice Exam 4

3 questions · hints · full answers · grading

Sign up freeTake the exam

More questions from this exam

Q01SECTION A: STRATEGIC CASE STUDY This question is worth 50 marks. You are a tax manager in a fir...HardQ03SECTION B: ADVISORY REPORT 2 This question is worth 25 marks. You are a tax consultant advising...Medium
View all 3 questions →