ACCA Advanced Taxation (ATX) Practice Exam

What happens to lifetime transfers that exceed the maximum exemption limit under IHT?

1. They are free from any tax implications

2. They are charged to IHT as normal

3. They are taxed at a reduced rate

4. They do not count towards the exemption

The correct answer is: They are charged to IHT as normal

When lifetime transfers exceed the maximum exemption limit under Inheritance Tax (IHT), they are treated as being charged to IHT as normal. This means that any amount above the exemption threshold is subject to the standard tax rules for IHT. Transfers made during an individual's lifetime can have various tax implications, and each donor has an annual exemption limit which, if exceeded, subjects the excess amount to tax. It's essential to understand that IHT operates on a tiered system, where only the value of the transfer that exceeds the exemption threshold is liable to tax. In terms of implications, if a transfer does exceed the exemption limit and is not covered by any other reliefs or exemptions (such as gift reliefs or spousal transfers), it will form part of the donor's estate for IHT purposes and is therefore assessed in the same way as other taxable transfers. This inclusion can affect the overall estate's liability to IHT, particularly if the estate's value approaches the IHT threshold. Option A is incorrect because transfers that exceed the IHT exemption limit do carry tax implications. Option C incorrectly suggests a reduced tax rate for excess transfers, which is not applicable since any excess amount is hit with the standard IHT rate. Option D is misleading;