ACCA Advanced Taxation (ATX) Practice Exam

If a donor incurs additional tax on PETs and CLTs upon death, who is responsible for the payment?

1. The donee

2. The donor

3. The estate of the deceased

4. A tax advisor

The correct answer is: The donee

When considering who is responsible for the payment of additional tax incurred on potentially exempt transfers (PETs) and chargeable lifetime transfers (CLTs) upon the donor's death, it's important to recognize the role of the taxpayer and the implications of various transfers. The correct answer is that the donee is responsible for the payment. This is because, upon the donor's death, any PETs that become exempt can lead to inheritance tax implications. When the donor makes a gift and then dies within seven years of that gift, the gift is no longer potentially exempt and may be included in the estate for inheritance tax purposes. The donee (the recipient of the gift) becomes responsible for the tax that is attributable to the gift if the donor has died within the relevant period. In the case of CLTs, if the donor has made a chargeable lifetime transfer, the tax liability can also fall to the donee since they benefit from the transfer. Additionally, although the estate of the deceased may also be involved in settling taxes owed on overall estate tax liabilities, the liability for the specific tax on PETs and CLTs generally falls to the donee when they are the ones who received the benefit of the transfer. Thus, the integral relationship between the transfer