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? (grossing up)

When the deceased leaves specific gifts that do not bear their own tax and the residue is partly exempt, you will need to 'gross up' the legacies in order to work out the value of the exempt part of the estate.

For more information about 'grossing' see our handy card on grossing, interaction and abatement. You can also use our grossing calculator (PDF 237K) to do the calculations for you.

Example

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

Personal estate		£500,000
Joint property (with wife)		£50,000
Real estate		£250,000
Settled property		£300,000

 

By Will, he left

• a pecuniary legacy of £100,000 to his son free of tax
• charitable legacies of £10,000
• ½ of the real estate to his wife absolutely and
• the residue to be shared equally between his wife and son.

The joint property passes to his wife by survivorship.

During his lifetime, he made gifts that gave rise to a cumulative total of £150,000.

Stage 1

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

Cumulative total of lifetime gift		£150,000
Legacies free of tax		£100,000
		£250,000
Less threshold at death		- £223,000
Excess over threshold		£27,000
Multiply 27,000 x 5/3		£45,000
Value of legacies		£100,000
Plus (45,000 – 27,000)		£18,000
Grossed up value of legacies		£118,000

 

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 the chargeable estate

Personal estate		£500,000
Real estate		£250,000
		£750,000
Less
Grossed up chargeable legacies		- £118,000
Charitable legacy		- £10,000
½ real estate to wife		- £125,000
		£497,000
½ residue exempt		- £248,500
Chargeable residue		£248,500
Chargeable estate - ½ residue		£248,500
Chargeable estate - Pecuniary legacy		£118,000
Grossed up value of legacies		£366,500

Property not passing under same title, that is the joint property passing by survivorship and the settled property, is excluded from the calculation.

Stage 3

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

Tax on initial estate

Cumulative total of gifts		£150,000
Initial estate		£366,500
		£516,000
Less threshold		- £223,000
		£293,500
Tax 293,500 @ 40%		£117,400

Re-gross the chargeable legacies paid free of tax

• 100,000 x 366,500 /(366,500 – 117,400) = £147,129

Stage 4

Determine the final value of the chargeable estate

Personal estate		£500,000
Real estate		£250,000
		£750,000
Less
Grossed up legacy to son		- £147,129
Charitable legacy		- £10,000
½ real estate to wife		- £125,000
		£467,871
½ residue exempt		- £233,936
Chargeable residue		£233,935
Chargeable estate - ½ residue		£233,935
Chargeable estate - Pecuniary legacy		£147,129
		£381,064

How would these calculations be carried forward to form IHT400 and the schedules?

• The joint property should be included on schedule IHT 404. Only brief details need be given and the exemption should be claimed.
• The settled property should be included on schedule IHT418, reporting as much information as the trustees have made available.
• The extent of the spouse exemption in the personal estate is worked out as
  

Value of Personal estate		£500,000
Grossed up legacies		- £157,129
(147,129+10, 000)		£342,871
½ residue		£171,436