ACCA ATX ^UK Syllabus A3. Inheritance Tax - 7 year accumulation principle - Notes ^{3 / 3}

2 things to remember

1. Firstly, every individual receives a nil rate band. If their total chargeable transfers exceed this nil rate band, only then is inheritance tax payable.

2. Secondly, if a transfer is made MORE than 7 years before an individual dies, then inheritance tax on death will not be paid on that transfer.

   The nil rate band is £325,000, and for previous years it has been:

The rate of IHT payable as a result of a person’s death is 40%

This is the rate that is charged on:

• a person’s estate at death

• PETs that become chargeable as a result of death within 7 years

• any additional tax payable on CLTs made within seven years of death

The rate of IHT payable on CLTs at the time they are made is 20% (half the death rate). This is the lifetime rate.

The tax rates information that will be given in the tax rates and allowances section of the exam in this period is:

Where nil rate bands are required for previous years then these will be given to you within the question.

Illustration 1:

Sophie died on 26 May 2024 leaving an estate valued at £600,000.

The IHT liability is as follows:

Death estate

Illustration 2:

Ming died on 22 April 2024 leaving an estate valued at £300,000.

On 30 April 2022, she had made a gift of £240,000 to her son.

This figure is after deducting available exemptions.

Solution:

IHT liabilities are as follows:

Lifetime transfer – 30 April 2022 (Less than 7 years)

The PET is initially ignored.

Additional liability arising on death

The IHT must be calculated for the gift £240,000, because Ming gave it to her son Less than 7 years before she died.

The PET utilises £240,000 of the nil rate band of £325,000. No IHT is payable.

Death estate

*Only £85,000 (325,000 – 240,000) of the nil rate band is available against the death estate.

Illustration 3:

Joe died on 13 October 2024 leaving an estate valued at £750,000.

On 12 November 2021, he had made a gift of £400,000 to a trust.

This figure is after deducting available exemptions.

The trust paid the IHT arising from the gift.

The nil rate band for the tax year 2021/22 is £325,000.

Lifetime transfer – 12 November 2021

The gift to a trust is a CLT. The lifetime IHT liability is calculated using the nil rate band for 2021/22.

Additional liability arising on death (13 October 2024)

The additional liability arising on death is calculated using the nil rate band for 2024/25.

Death estate (13 October 2024)

The CLT made on 12 November 2021 has fully utilised the nil rate band of £325,000.

A NRB is given every year, therefore the CLT used the NRB of 21/22 when lifetime tax was calculated

The NRB of 24/25 is used to calculate tax paid on death, it is first given to the CLT and then the death estate because it is allocated in chronological order

Illustration 4

Mr Wealthy made the following gifts during his lifetime. 

01/11/2023 £333,000 into a trust for his son (the trustees paid any life tax)

14/11/2024 £50,000 cash to his daughter

He died in January 2025 with an estate valued at £500,000.

What is his IHT payable during his lifetime and on his death?
Ignore annual exemptions.

The NRB of 23/24 and 24/25 are £325,000. 

Solution

• Gift to a trust - CLT

  Gift to trust £333,000
  Less NRB (£325,000)
  £8,000 *20% = £1,600 lifetime tax. 

  On death:
  NRB is £325,000 (New NRB for 24/25)

  This is allocated on chronological order - first to the CLT, then PET, then death estate.

  CLT £333,000
  NRB (£325,000)
  £8,000 *40% = £3,200
  IHT paid (£1,600)

  IHT due £1,600

• PET £50,000 * 40% = £20,000 IHT due

• Death estate £500,000 *40% = £200,000 IHT due on death estate

The 7 year cumulation period

In most of the illustrations so far, all the lifetime transfers, both PET’s and CLT’s have taken place within the 7 years prior to death and have all therefore been chargeable to IHT on the death of the taxpayer.

Very important note The earliest / oldest transfers within this period are first to use the nil rate band with the later transfers and / or the chargeable estate at death then being taxed at 40%.

Basically, the nil rate band must be applied in chronological order - it is given to the gift made earliest.

If PET’s have been made more than 7 years before the date of death

• they were neither chargeable when made nor chargeable on death, they are exempt from IHT and are ignored.

A CLT made more than 7 years before death

• These transfers were chargeable when made using the nil rate band in force at that date but are not chargeable on death as the taxpayer has survived for the required 7 years.

The 7 year cumulation period, however means that when computing the IHT on either a PET or CLT made within the 7 years of death it is necessary to take account of any CLT made within the 7 years prior to it, so as to determine how much nil rate band, if any, remains to use against that transfer.

For example

if an individual dies in January 2025 having made a CLT in June 2014 of £255,000, this CLT will not be taxable on the death as he survived for more than 7 years.

If he had also made a PET in August 2020 of £200,000 this will be taxable.

In computing the nil rate band available to go against the PET, however, the £325,000 will be reduced by the amount of the June 2014 CLT as this was within the 7 years prior to the PET.

Therefore, the NRB available to the PET would be (£325,000-£255,000) = £70,000

IHT payable on the PET
Value of PET £200,000
Less NRB (£70,000)

£130,000 *40%  = £52,000

Illustration

Lachlan made a CLT in 2014 of £200,000 and a PET in 2017 of £255,000

He died in 2024 with an estate value of £500,000.

NRB in 2024 is £325,000.

How will the NRB be shared?
How much IHT will be payable?

Solution

He will have to pay death tax when he dies, his NRB of 2024 will first go to the PET BUT, the PET must share it with the CLT because it was within 7 years of the PET.

Therefore, NRB available to PET is (£325,000-£200,000) = £125,000

IHT payable on PET
Value £255,000
Less NRB (£125,000)
£130,000 * 40% = £52,000

Note: the CLT is more than 7 years before death and as such it will not be subject to death tax.

Then, for his death estate - the NRB will only be shared with the PET as that is within 7 years of the date of date.
NRB available on death = £325,000 - £255,000 (Value of PET) = £70,000

Estate value £500,000
Less NRB (£70,000)
£430,000 * 40% = £172,000

Illustration

Lachlan made a PET in 2014 of £200,000 and a PET in 2017 of £255,000.

He died in 2024 with an estate valued at £500,000.

NRB is £325,000.

How will the NRB be shared?
How much IHT will be payable?

Solution

He will have to pay death tax when he dies, his NRB of 2024 will first go to the 2017 PET of £255,000 BUT, the PET will not share it with the 2014 PET of £200,000 because that was given more than 7 years before death and therefore exempt from IHT.

IHT payable for PET
Value of PET £255,000
NRB (£255,000)
Nil payable 

Remaining NRB for the death estate £325,000 - £255,000 = £70,000

The NRB for the death estate will only be shared with the 2015 PET of £255,000 as that is within 7 years.

IHT payable on death estate
Value of estate £500,000
Less NRB (£70,000)
£430,000*40% = £172,000

Note on death, NRB is shared with PET's that occur within 7 year's of death.

Note

When a gift is made during lifetime, the value of the gift is frozen and will only become chargeable to IHT when the person who made the gift dies. 

Therefore, if a grandmother makes a gift to her grandchild - IHT will only be paid once by the grandmother and the second time when the grandchild dies, this avoid's the additional IHT payable if the grandmother made a gift directly to her child. 

To avoid additional IHT - making gifts to grandchildren as opposed to children is a good option.