Part 2 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).
In the first part of this article we looked at the approach that needs to be taken when considering the inheritance tax (IHT) and capital gains tax (CGT) implications of a particular transaction.
The remaining parts of this article look at the two taxes in more detail, starting with an overview of the fundamentals as set out in Table 1 below. You should read the table carefully and think about the issues raised. If you do not have sufficient knowledge to think through the implications of a particular point you should research that area in your study text.
Table 1: Overview of CGT and IHT
CGT | IHT | |
|---|---|---|
| Arises on: | • Sales | • Gifts or sales at an undervalue, if either: - Chargeable lifetime transfers - Potentially exempt transfers within seven years of death • The death estate |
| Relevant value: | Market value of the asset | Fall in value of the donor’s estate |
| Relevance of residence and domicile: | Liability to CGT:
| Residency is relevant when considering deemed UK domicile
|
Transfers to spouse | Take place at no gain, no loss | Exempt
|
The importance of timing | • Need to consider the tax year of disposal which will determine: • Utilisation of | Need to consider: • The availability of the annual exemption |
Exemptions | Various assets are exempt, including: • Wasting chattels There is also an annual exempt amount | All assets are subject to IHT with one important exception: • Overseas assets owned by an overseas domiciled individual Certain lifetime gifts are exempt (up to specified limits) including: • Small gifts There is also an annual exemption for lifetime gifts |
Reliefs available in respect of business assets | Rollover relief • Requires proceeds to be invested in replacement business assets
| Business property relief |
Other reliefs | Enterprise investment scheme; and • Requires proceeds to be invested in qualifying unquoted trading company shares | Agricultural property relief |
| Other matters to consider: | • The availability of double tax relief • Due dates | • The availability of quick succession relief • The availability of double tax relief • The availability of fall in value relief on death • Due dates • Who is responsible for paying any tax due |
The remainder of this article is based on the scenario set out below. The scenario is a combination of two commonly examined situations: the comparison of alternative gifts and the comparison of gifting an asset now with leaving it to the intended recipient via a will.
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.
|
The tax implications of the two gifts are considered in part 3 of this article. Commercial matters would also have to be considered: particularly in relation to the introduction of a new shareholder in Adventure Ltd, a company controlled by Edward.
Before you read part 3, you should think through the headings that would be necessary in order to address the IHT and CGT implications of the proposed gifts and identify as many of the issues as you can.
You need to have a strong, well-structured knowledge of the IHT and CGT rules in order to deal with a question in the exam. You also need to be able to explain the potential tax implications of a transaction clearly and logically.
When addressing the tax issues you should stop and think before you start writing and note down briefly the points you intend to make. Then make sure that you make all of the points in 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.