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 |
|
£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 |
