Part 3 of 4
This is the Finance Act 2023 version of this article. It is relevant for candidates sitting the ATX-UK exam in the period 1 June 2024 to 31 March 2025. Candidates sitting ATX-UK after 31 March 2025 should refer to the Finance Act 2024 version of this article (to be published on the ACCA website in 2025).
So far in this article we have looked at how to approach questions involving both inheritance tax (IHT) and capital gains tax (CGT) and we have reviewed the fundamentals of the two taxes. We are now going to look at the tax implications of the Edward Teach scenario, as set out below, in some detail.
Edward Teach, a 74 year old widower, has one child, Anne Bonney. Edward intends to leave the whole of his estate to Anne on his death but wishes to make a lifetime gift to her on 1 June 2024. Anne will sell the gift received from Edward immediately in order to enable her to purchase a second home overseas. Both Edward and Anne are resident and domiciled in the UK. There are two possible gifts: 1. 6,000 shares in Adventure Ltd
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(a) IHT implications
Lifetime gift
The gift would be a potentially exempt transfer that would only be subject to IHT if Edward were to die within seven years. If the gift became chargeable, business property relief would not be available as Anne will not own the shares at the time of Edward’s death.
Edward intends to retain some of his shares in Adventure Ltd. Accordingly, the value of the transfer would be the fall in value of Edward’s estate at the time of the gift. This is likely to differ from the market value of the shares gifted as Edward’s holding would be reduced from 80% to 56% such that he would no longer be in a position to prevent special resolutions being passed.
The fall in value in Edward’s estate would be reduced by any available annual exemptions. IHT would then be due on the excess of this amount over the nil rate band at the date of death as reduced by any chargeable transfers in the seven years prior to the gift of the shares. Taper relief would be available if Edward were to survive the gift by at least three years. The maximum IHT liability would be 40% of the fall in value.
Gift via Edward’s will
100% business property relief would be available on the non-excepted assets. Accordingly, only 8% of the value of the shares as at the time of death would be subject to IHT (this is on the assumption that the proportion of the company’s assets held in the form of investments has not changed).
The shares would be included in Edward’s death estate. The excess of the death estate over the available nil rate band (as reduced by any chargeable transfers in the seven years prior to death) would be subject to IHT at 40%. The maximum liability would be 3.2% (8% x 40%) of the value of the shares. Assuming that the market value of the shares at Edward’s death remains the same as the current market value, this would result in a maximum charge to IHT of £20,800.
(b) CGT implications
Lifetime gift
Edward would make a chargeable gain by reference to the deemed sales proceeds equal to the market value of the shares, ie a gain of £100,000 (£650,000 – £550,000).
Edward owns more than 5% of Adventure Ltd and has owned the shares for more than two years. In addition, Adventure Ltd is a trading company. However, business asset disposal relief will only be available if Edward is an employee or director of Adventure Ltd.
Gift holdover relief would be available as the shares are unquoted and Adventure Ltd is a trading company. However the relief would be restricted because the company owns non-business chargeable assets (the investment land).
If Edward is an employee/director of Adventure Ltd, such that business asset disposal relief is available, gift holdover relief should not be claimed (unless Anne has significant capital losses). Edward’s gain of £100,000 would be reduced by any available annual exempt amount; the maximum capital gains tax would be £10,000 (£100,000 x 10%). Anne’s base cost in the shares would be their market value at the time of the gift. Accordingly, there would be no gain on the immediate sale of the shares by Anne following the gift as her sales proceeds would equal her base cost.
If Edward is not an employee of Adventure Ltd, he and Anne should claim gift holdover relief in order for each of them to benefit from an annual exempt amount. Edward would realise a gain of £12,000 (£100,000 x 12%) due to the non-business chargeable assets, which would then be reduced by any available annual exempt amount. The maximum CGT liability would be £2,400 (£12,000 x 20%) depending on the level of his income and the existence of any other chargeable gains. The remainder of the gain of £88,000 would be held over and would reduce Anne’s base cost to £562,000 (£650,000 – £88,000). Accordingly, Anne’s gain would be £88,000 (£650,000 – £562,000) as reduced by any available annual exempt amount. Anne’s maximum CGT liability would be £17,600 (£88,000 x 20%). The total CGT due would be a maximum of £20,000 (£2,400 + £17,600).
Gift via Edward’s will
Gifts on death are exempt from CGT.
Anne’s base cost would be the market value of the shares at the time of death.
(a) IHT implications
Lifetime gift
The gift would be a potentially exempt transfer and would only be subject to IHT if Edward were to die within seven years. IHT at 40% would be due on the excess of the value of the boat at the time of the gift (as reduced by any available annual exemptions) over the available nil rate band at the date of death (as reduced by any chargeable transfers in the seven years prior to the gift). Taper relief would be available if Edward were to survive the gift by at least three years.
Gift via Edward’s will
The boat would be included in Edward’s death estate at its value on death. The excess of the death estate over the available nil rate band (as reduced by any chargeable transfers in the seven years prior to death) would be subject to IHT at 40%.
(b) CGT implications
Lifetime gift
The boat is a wasting chattel (tangible, moveable property with a useful life of no more than 50 years) and as such is an exempt asset for the purposes of capital gains tax.
Gift via Edward’s will
Gifts on death are exempt from CGT.
Where a scenario involves alternative courses of action and concerns more than one tax it is vital to include plenty of headings within your explanation, so that the reader always knows which situation and which tax you are referring to. As always, you should make brief notes of the points you intend to make and then ensure that you make all of them within the time available.
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.