ACCA Advanced Taxation (ATX) Practice Exam

How does taper relief operate in the context of IHT?

1. It increases the amount exempt from tax the longer the asset is held

2. It reduces the tax payable based on the duration the donor has held the asset

3. It is only applicable to assets gifted within seven years

4. It has no effect on the amount of IHT due

The correct answer is: It reduces the tax payable based on the duration the donor has held the asset

Taper relief is a mechanism designed to lessen the impact of Inheritance Tax (IHT) on gifts made during a person's lifetime, particularly in relation to the value of those gifts when calculating IHT liabilities. When an individual makes a gift and survives for a period of time post-gift, the taper relief gradually reduces the amount of tax payable on the gift as time elapses. This relief is structured to encourage people to give during their lifetime without the fear of heavy tax implications shortly after gifting. As a donor holds onto an asset for a longer duration before passing away, the taxable value of that gift decreases, leading to a lower tax liability. Specifically, if the donor survives for three years after making a gift, the taper relief may significantly benefit the donor's estate, reducing the value subject to tax. It's important to understand how taper relief operates in the context of lifetime gifting in order to plan effective tax-efficient strategies. This reflects the principle that the longer an asset is held before being passed on, the greater the reduction in the taxable value of that asset, ultimately reducing the overall tax burden associated with Inheritance Tax.