Inheritance tax and capital gains tax for ATX-UK

Part 1 of 4

This is the Finance Act 2021 version of this article. It is relevant for candidates sitting the ATX-UK exam in the period 1 June 2022 to 31 March 2023. Candidates sitting ATX-UK after 31 March 2023 should refer to the Finance Act 2022 version of this article (to be published on the ACCA website in 2023).

Inheritance tax (IHT) and capital gains tax (CGT) are tricky taxes, each with their own exemptions and reliefs, and different methods of calculating the tax due.  As a result, having got to grips with the rules of each of them, it can seem like a step too far to deal with both of them in respect of the same transaction. However, once it is appreciated that the taxes should be addressed one at a time (and not simultaneously), it becomes clear that all that is necessary is a clear knowledge of the rules together with an orderly approach to the situation in the question.

This is not an introductory article: it is relevant to students coming to the end of their studies and finalising their preparations to sit the exam. It considers the position where both taxes are relevant to a transaction and illustrates some of the matters which are relevant when giving advice in the context of the ATX-UK exam.

This article does not include comprehensive explanations of the two taxes but assumes a reasonable knowledge of the rules. It is intended to be read proactively – ie statements made should be confirmed as true by reference to your understanding of the two taxes or to a relevant study text. This approach will enable situations to be analysed from first principles rather than by reference to a rigid set of memorised planning points.

Relevant transactions

It can be tempting to think that IHT is only relevant where a transaction includes an element of gift, such that there is a fall in value of the donor’s estate, and that CGT only arises in respect of lifetime disposals and can be ignored on death.  However, it is always worth considering both taxes where disposals of capital assets are being contemplated.  Two examples of the importance of this are given below.

1. The principal relevant tax on the sale of an asset is CGT.  However, a sale can also have an effect on the vendor’s future IHT position.
   
   An example would be where assets qualifying for business property relief are sold and the proceeds are retained in the form of cash or used to acquire assets that do not qualify for business property relief.  This will bring about an increase in the IHT due on the death of the vendor in respect of the vendor’s estate due to the lack of business property relief on that part of the individual’s wealth.
   
   
2. The principal consideration on the transfer of an asset on death is IHT.
   
   However, it is important not to ignore CGT.  CGT is still relevant when advising on such a transfer due to the lack of a CGT liability as compared with the situation on a lifetime gift. There is also the fact that the legatee’s base cost in the inherited asset for CGT purposes is its probate value.

This article is confined to transactions between individuals. For situations where trusts are involved, see the article ‘Trusts and tax’. For further detail regarding the relevance of residency and domicile see the article ‘International aspects of personal taxation’.

Exam approach

The main problem demonstrated by candidates in the exam is a lack of precise knowledge of the rules governing the two taxes. This is particularly evident in connection with the availability of exemptions and reliefs. Accordingly, your first task is to acquire an orderly knowledge of the rules such that you do not confuse the two taxes in the exam.

The two taxes should always be addressed separately under appropriate subheadings; never try to address both taxes at the same time. Strictly, it does not matter which of the taxes is addressed first but it is likely to be useful to consider IHT first as the IHT implications may be useful when considering gift holdover relief for CGT.

Written by a member of the ATX-UK 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 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.