HMRC Inheritance Tax: Customer Guide

How do I work out the chargeable estate where there are specific gifts free of tax and the residue is partly exempt and there are assets which qualify for agricultural or business relief? (interaction and grossing up)

This is an example of the calculations necessary when the deceased leaves an estate that

  • is partly exempt
  • contains property that is entitled to agricultural or business relief
  • contains at least one specific legacy of non-relievable property and
  • not all the relievable property is specifically given.

For a simple interaction calculation, demonstrating the interaction between agricultural or business relief and exemptions, go to Tell me about the interaction of business and agricultural relief and exemptions.

The deceased died on 28 February 1999, leaving an estate as follows

Personal estate (chattels £20,000)

 

£500,000

Farmland (agricultural relief due at 50%)

 

£300,000

Unquoted shares (business relief due at 100%)

 

£500,000

Residence

 

£200,000

Settled property

 

£250,000

 

£1,750,000
 

By Will, he left

  • pecuniary legacies to his daughters of £200,000 free of tax
  • the unquoted shares to his son
  • charitable legacies of £50,000
  • the chattels and residence to his widow and
  • the residue of his estate equally between his widow and three children

As there is both spouse or civil partner exemption and business and agricultural relief means that an 'interaction' calculation is required.

During his lifetime, he made gifts totalling £150,000.

Stage 1

Establish the value of the property passing under the Will

 

£1,500,000

and deduct

 

 

Agricultural relief

 

- £150,000

Business relief

 

- £500,000

 

£850,000

Stage 2

  • Establish the value of any specific legacies of relievable property after relief = Nil (unquoted shares qualify for relief at 100%)

Stage 3

As there is other relievable property (the farmland) that is not specifically given, establish the fraction to proportionately reduce all other specific gifts.

Fraction = Value of estate after AR/BR (less specific legacies of relievable property at reduced value) divided by Value of estate before AR/BR (less specific legacies of relievable property at unreduced value)

In this case the fraction is

  • (850,000 – Nil) / (1,500,000 – 500,000) = 850,000 / 1,000,000

Reduce other legacies by this fraction

  • 200,000 x 850,000 / 1,000,000 = 170,000 (reduced value of pecuniary legacies)
  • 50,000 x 850,000 / 1,000,000 = 42,500 (reduced value of charitable legacy)
  • 220,000 x 850,000 / 1,000,000 = 187,000 (reduced value of legacies to spouse
    chattels 17,000, residence 170,000)

Stage 4

Gross up the reduced value of the chargeable legacies paid free of tax at their own rate.

Stage 1

Cumulative total of gifts

 

£150,000

Reduced value of gifts free of tax

 

£170,000

 

£320,000

Less threshold at death

 

- £223,000

 

 

£97,000

Multiply 97,000 x 5/3

 

£161,667

Value of legacies

 

£170,000

Plus (161,667 – 97,000)

 

£64,667

Grossed up value of legacies

 

£234,667

Note -

If the value of the cumulative total of lifetime gifts exceed the threshold, you simply need to multiply the value of the chargeable legacies that are free of tax by 5/3 to arrive at the grossed value of the legacies and then move to stage 2.

If the total value of the cumulative total of lifetime gifts plus the value of the legacies free of tax does not exceed the threshold, move directly to stage 2 and use the actual value of the legacies.

Stage 2

Determine the initial value of chargeable estate

Personal estate

 

£500,000

Farmland (after relief at 50%)

 

£150,000

Unquoted shares (after relief at100%)

 

£0

Residence

 

£200,000

 

£850,000

Less

 

Unquoted shares to son

 

£0

Grossed up legacies

 

- £234,667

Reduced charitable legacy

 

- £42,500

Reduced legacy to spouse

 

- £187,000

 

 

£385,833

Less ¼ residue exempt

 

- £96,458

Chargeable residue

 

£289,375

Chargeable estate:

 

 

¾ residue

 

£289,375

Grossed up legacies

 

£234,667

 

£524,042

Stage 3

Gross up the reduced value of chargeable legacies paid free of tax at the initial rate

Tax on initial estate

Cumulative total of gifts

 

£150,000

Initial estate

 

£524,042

 

£674,042

Less threshold

 

- £223,000

 

 

£451,042

Tax 451,042 @ 40%

 

£180,417

 

 

 

Re-gross the chargeable legacies paid free of tax

  • 170,000 x 524,042 / (524,042 – 180,417) = £259,257

Stage 5

Calculate the residue using the reduced values

Value of estate after relief

 

£850,000

Less

 

Unquoted shares to son

 

£0

Grossed up legacies

 

- £259,257

Reduced charitable legacy

 

- £42,500

Reduced legacy to spouse

 

- £187,000

 

 

£361,243

¼ residue exempt

 

- £90,311

Chargeable residue

 

£270,932

Stage 6

Calculate chargeable estate

¾ residue

 

£270,932

Grossed up legacies

 

£259,257

 

£530,189

How would these calculations be carried to the IHT400?

  • Exemption for the reduced value of the legacies to the spouse and the charity can be deducted against the appropriate section.
  • Agricultural and business relief can be deducted at box93, form IHT400.
  • The residue at £361,243 contains both personal estate and real estate and ¼ of it is exempt. The legacies to be paid from the personal estate are
  • Chattels (at reduced value) £17,000
  • Grossed up value of pecuniary legacies £259,257
  • Legacy to charity (at reduced value) £42,500

These total £318,757, leaving a residue of £181,243 (500,000 – 318,757), ¼ of which is £45,311.

The legacies to be paid from the real estate are

  • Residence to spouse (at reduced value) £170,000
  • Legacy of farmland to son (after relief) £150,000

These total £320,000, leaving a residue of £180,000 (500,000 – 320,000), ¼ of which is £45,000.