Part 4 of 4
This is the Finance Act 2015 version of this article. It is relevant for candidates sitting the P6 (UK) exam in the period 1 September 2016 to 31 March 2017. Candidates sitting P6 (UK) after 31 March 2017 should refer to the Finance Act 2016 version of this article (to be published on the ACCA website in 2017).
Having looked in detail at the Edward Teach scenario we are now going to summarise our findings. This can be tricky to do where we do not have all of the information. For example, we do not when Edward Teach will die or whether he is an employee of Adventure Ltd. You must ensure that any summary you prepare in the exam brings together the fundamental aspects of your answer and then make judgements based on your findings: this is not easy to do.
CGT liability at time of gift | IHT liability on death |
|
---|---|---|
Shares: | ||
Lifetime gift | Edward is an employee:
| Possibly significant if death within seven years.
|
Death | Nil – No CGT on death | Small (due to BPR) |
Yacht: | ||
Lifetime gift | Nil – Exempt asset | Possibly significant if death within seven years.
|
Death | Nil – No CGT on death | Significant |
It is clear from this summary that, purely from a tax point of view, Edward should give Anne the yacht rather than the shares.
There will be no tax at the time of the gift. In addition, there will be no tax at the time of death provided Edward survives the gift by seven years. Even if Edward were to die within seven years of the gift, the amount of IHT due on death is likely to be less than the amount due if the yacht were held by Edward until death due to the availability of taper relief. Before concluding on this it would be necessary to consider the chargeable transfers made by Edward during the seven years prior to the proposed gift and the likelihood of the yacht increasing in value.
The situation regarding a gift of the shares is not so straightforward. A lifetime gift will result in a CGT liability of up to £28,000. There is also the possibility of an IHT liability of 40% of the fall in value of Edward’s estate if Edward were to die within three years of the gift. However, there would be no IHT liability if he were to survive the gift by at least seven years.
Retaining the shares until death would avoid the CGT liability but would guarantee an IHT liability up to a maximum of 3.2% of the value of the shares.
Accordingly, a lifetime gift of the shares would be a gamble by Edward. If he were to survive the gift by seven years, the total tax due would be CGT of either £10,000 or £28,000 depending on whether or not he is an employee of Adventure Ltd. If he were to die within three years of the gift, the total tax due is likely to be considerable due to the IHT payable. His alternative is to hold on to the shares and pay a relatively small amount of IHT out of his death estate.
Finally, Edward should be advised that an insurance policy could be taken out on his life in order to satisfy any future IHT liability arising in respect of a lifetime gift.
The following general conclusions can be drawn from the above.
Written by a member of the P6 examining team
The comments in this article do not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content of this article as the basis of any decision. The authors and the ACCA expressly disclaim all liability to any person in respect of any indirect, incidental, consequential or other damages relating to the use of this article.