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 IHT200 (PDF 107K)?
- 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 against the property in section G.
- 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.
