ACCA Advanced Taxation (ATX) Practice Exam

Which of the following is true about the inheritance tax treatment of gifts?

1. All gifts are exempt after ten years

2. Gifts with reservation may create additional tax liabilities

3. Gifts are never subject to taxation

4. Gifts cannot exceed a certain value to be exempt

The correct answer is: Gifts with reservation may create additional tax liabilities

In the context of inheritance tax, the treatment of gifts can significantly impact the overall tax liabilities of an estate. The statement that gifts with reservation may create additional tax liabilities is correct. This situation arises when an individual makes a gift of an asset but continues to benefit from that asset in some way, such as living in a house they have gifted to someone else. In such cases, the arrangement can be seen as a "gift with reservation of benefit," and the asset may still be considered part of the giver's estate for inheritance tax purposes. This means that rather than being fully exempt from tax, the value of the gifted asset may still be subject to inheritance tax calculations upon the death of the donor. This principle helps ensure that individuals do not evade estate tax responsibilities simply by transferring assets while retaining some level of control or benefit from them. The other statements do not accurately reflect the nuances of inheritance tax related to gifts. There are specific exemptions and allowances, but not all gifts become tax-exempt after a certain period, nor are gifts exempt from taxation altogether. Additionally, while there are annual gifting allowances, the value of gifts does not simply preclude them from tax; rather, the total value and conditions surrounding those gifts may require careful consideration within inheritance tax