ACCA Advanced Taxation (ATX) Practice Exam

Which formula is used for property valuation for inheritance tax purposes?

1. (A + B) x total assets

2. A/(B + total assets) x value of A

3. A/(A + B) x value of total combined assets

4. A + B x total combined value

The correct answer is: A/(A + B) x value of total combined assets

The correct choice involves using the formula A/(A + B) x value of total combined assets for property valuation in the context of inheritance tax. This formula is grounded in the principle of proportionality when assessing the value of an individual's estate for tax purposes. In this formula, "A" represents the component of the property or asset that is subject to inheritance tax, while "B" denotes any liabilities or deductions that might reduce the taxable estate’s overall value. By calculating A/(A + B), you establish the proportion of the total assets that is attributable to the taxable portion "A". Multiplying this proportion by the total combined assets gives a precise valuation for tax assessment. This ensures that the property is taxed in a manner that accurately reflects its share of the estate rather than applying a flat value that does not take into account the specific details of the asset and the associated liabilities. Understanding this formula is essential for accurately determining the tax liability of an estate, which can involve complex considerations around shared properties, debts, and valuations. This highlights the importance of calculating the correct taxable value rather than simply applying an arbitrary method.