ACCA Advanced Taxation (ATX) Practice Exam

If an asset is sold during the instalment period for Inheritance Tax (IHT), what must happen regarding the outstanding balance?

1. It can be paid later

2. It must be paid immediately

3. It is waived in such cases

4. The payment must be discussed with the tax authority

The correct answer is: It must be paid immediately

When an asset is sold during the instalment period for Inheritance Tax (IHT), the outstanding balance of the tax must be paid immediately upon the sale of the asset. This requirement aligns with the IHT rules that state that if a taxpayer disposes of an asset for which tax liability has been deferred through an instalment agreement, they can no longer benefit from that deferral and must settle the tax due at the time of the disposal. Immediate payment is necessary as the sale of the asset activates the tax liability that was previously postponed. This ensures that the tax system maintains its integrity and that obligations are met as assets change hands. The policy serves as a mechanism to prevent tax avoidance by allowing taxpayers to defer tax liability and then evade payment upon selling their assets. The other choices do not accurately represent the requirements placed on taxpayers in this situation. While it may seem practical to discuss payment options or to consider waiving certain liabilities, the framework for IHT clearly mandates that the tax must be settled immediately when an asset is sold during an instalment agreement.