ACCA TX Course - Chapter 21: Inheritance Tax (Part 1)

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Chapter 21 discusses inheritance tax (IHT), focusing on its basics and the implications of gifting wealth during life or upon death. IHT is a tax on the transfer of wealth, and it can arise not just when someone dies but also during their lifetime, around the time of the gift. Gifting can fall into three categories: chargeable lifetime transfers (CLTs), potentially exempt transfers (PETs), and completely exempt transfers.

CLTs typically involve transfers into a trust, which is an arrangement where a donor places property in a "pot" for someone else's benefit, managed by appointed trustees. A key point is that if the donor dies within seven years of making a gift, additional tax may apply to that gift. The idea is to encourage individuals to gift early in life to minimize IHT impacts.

When we consider the value of gifts, a concept called "diminution in value" becomes relevant. This measure looks at the reduction in an estate's value from a gift. For example, gifting shares might differ in value depending on the percentage of shares transferred, especially if the donor has significant control.

The term "property" in IHT broadly includes cash, shares, and other assets unless specified as excluded property. There is a notable distinction between IHT and capital gains tax (CGT) where assets exempt under CGT could still be liable for IHT.

Calculations concerning IHT are divided into three stages: lifetime gifts through CLTs, additional IHT due on gifts if the donor dies within seven years, and finally, IHT due on the estate of the individual at death. Planning around these stages involves gifting assets and ideally surviving for seven years to avoid increased tax on gifts.

Lifetime transfers include several exemptions that can help reduce a donor's taxable estate. For example, gifts between spouses or civil partners are entirely exempt from IHT, allowing one partner to pass their entire estate to the other without tax consequences. However, the tax may still be due later when the surviving spouse passes away, as the assets may increase in value.

Other key lifetime exemptions consist of regular gifts out of income, small gifts up to £250, marriage gifts, and an annual exemption. Regular gifts must not affect the giver's standard of living. The annual exemption allows for the first £3,000 of lifetime transfers to be tax-free, with the option to carry forward unused exemption from the previous year.

In conclusion, understanding the nuances of IHT, the impact of gifting strategies, and the available exemptions are vital for effective estate planning to minimize tax liabilities. The chapter emphasizes the importance of early gifting, knowing different transfer categories, and utilizing exemptions for reducing IHT.


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