ExpertMedium2 marksMultiple Choice
ACCA · Question 21 · Inheritance Tax
Section B: Case 2 - Eleanor Vance
Scenario: Eleanor Vance, a wealthy agricultural landowner, made several lifetime transfers before her death on 12 November 2023. On 15 August 2021, she transferred £450,000 of cash into a discretionary trust. Eleanor paid the lifetime Inheritance Tax (IHT) arising on this transfer. She had made no previous lifetime gifts.
Question: What was the lifetime IHT payable by Eleanor on the creation of the discretionary trust in August 2021? (Assume the nil rate band is £325,000 and the annual exemptions for 21/22 and 20/21 are available).
Section B: Case 2 - Eleanor Vance
Scenario: Eleanor Vance, a wealthy agricultural landowner, made several lifetime transfers before her death on 12 November 2023. On 15 August 2021, she transferred £450,000 of cash into a discretionary trust. Eleanor paid the lifetime Inheritance Tax (IHT) arising on this transfer. She had made no previous lifetime gifts.
Question: What was the lifetime IHT payable by Eleanor on the creation of the discretionary trust in August 2021? (Assume the nil rate band is £325,000 and the annual exemptions for 21/22 and 20/21 are available).
Answer options:
A.
£23,500
B.
£29,750
C.
£23,800
D.
£25,000
How to approach this question
Deduct two years of Annual Exemptions (£3,000 each) from the gift. Deduct the Nil Rate Band (£325,000). Since the donor pays the tax, apply the 25% (20/80) rate to the excess.
Full Answer
B.£29,750✓ Correct
A transfer to a discretionary trust is a Chargeable Lifetime Transfer (CLT).
Value transferred = £450,000.
Less: Annual Exemptions for current and previous year = £3,000 + £3,000 = £6,000.
Net transfer = £444,000.
Less: Nil Rate Band = £325,000.
Taxable amount = £119,000.
Because Eleanor (the donor) paid the tax, the rate is 25% (representing 20/80 of the net amount).
Lifetime IHT = £119,000 x 25% = £29,750.
Common mistakes
Using the 20% rate instead of 25% when the donor pays, or forgetting to deduct the annual exemptions.
Practice the full ACCA TX — Taxation Practice Exam 1
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