IHTM26158 - Step 4 - four stage grossing calculations: example of a four stage calculation where interaction and settled property are also involved
This example illustrates both four stage grossing up and the interaction (IHTM26101) calculation of the IHTA84/S39A (3) and (4) proportionate reduction where the Inheritance Tax estate includes property at more than one title (IHTM26211) and a lifetime cumulation (IHTM14501). It combines
Example
Diana dies in January 2001
Her estate consists of
| Free estate | £500,000 | |
| Settled property | £1,800,000 |
The free estate consists of
| Control holding of unlisted shares (qualifies for business relief (BR) at 100%) | £600,000 | |
| Land let to company (qualifies for BR at 50%) | £400,000 | |
| House and chattels | £200,000 | |
| Other property | £600,000 |
Settled property consists of listed securities valued at £500,000
There is also a lifetime cumulative total of £80,000
Free estate passing by Will:
- Land let to company to son subject to tax
- House and chattels to husband
- £300,000 each to husband and daughter free of tax
- Residue - half to husband, half equally to son and daughter.
1
The value transferred (free estate only) is
| Value of the estate | £1,800,000 | |
| Less BR | ||
|
£600,000 | |
|
£200,000 | |
| Total BR | £800,000 | |
| Value transferred = | £1,000,000 |
Interaction Stage 2
There is one specific gift of relievable property, the gift of land to the son. This is taken at its value after relief of £200,000.
Interaction Stage 3
There is other relievable property. So the specific gifts to the wife and daughter have to be reduced by the S39A(4) fraction
This fraction is based solely on the property comprised in the free estate (that is excluding settled property and ignoring the lifetime cumulative total):
| (a) = | £800,000 |
| (b) = | £1,400,000 |
- (a) = the reduced value of the free estate (£1,000,000) less the reduced value of the specific gift (£200,000)
- (b) = the unreduced value of the free estate (£1,800,000) less the unreduced value of the specific gift (£400,000).
Accordingly, the reduced values are
Gift to widow:
£500,000 x (£800,000 ÷ £1.400,000) = £285,714
Legacy to the daughter:
£300,000 x (£800,000 ÷ £1,400,000) = £171,429
Interaction Stage 4
The chargeable specific gift to the daughter has to be grossed up using the reduced values. Four stage grossing is appropriate.
In these calculations the settled property is ignored but the cumulation is taken into account.
Grossing Stage 1
The only chargeable specific gift free of tax is the legacy of £300,000 to the daughter. The value to be grossed up is the reduced value of £171,429.
In accordance with IHTA84/S38 (3), this is initially grossed up at the rate appropriate to its separate value:
| Value of gift (as reduced) | £171,429 | |
| Nil rate band | £234,000 | |
| Less lifetime cumulation | £80,000 | |
| Equals unused threshold to be taken from reduced gift | £154,000 | |
| £17,429 | ||
| This figure × (100 ÷ 60) = | £29,048 | |
| Add back unused threshold | £154,000 | |
| Initial grossed up legacy | £183,048 |
Grossing Stage 2
Initial determination of the chargeable part of the estate:
| Grossed up gift to daughter | £183,048 | |
| Gift to son bearing own tax | £200,000 | |
| Exempt specific gifts | £285,714 | |
| Total specific gifts | £668,762 |
| Total free estate | £1,000,000 | |
| Less total specific gifts | £668,762 | |
| Residue = | £331,238 | |
| One half of residue is exempt | £165,619 | |
| one half is chargeable | £165,619 | |
| Total chargeable free estate | £183,048 + £200,000 + £165,619 | £548,667 |
Grossing Stage 3
The daughter’s legacy at its reduced value of £171,429 is grossed up again at the rate appropriate to a chargeable estate of £548,667 and a lifetime cumulation of £80,000. As before the settled property is ignored.
| Lifetime cumulation | net value | £80,000 |
| Chargeable death transfer | £548,667 | |
| Total | £628,667 | |
| Tax on that revised total After nil rate band of £234,000 = | £157,867 | |
| Less tax on lifetime transfer at death rates | Nil | |
| Tax on death estate | £157,867 |
The chargeable death estate net of tax is £548,667 less tax of £157,867 = £390,800
The gross equivalent of the specific gift of £171,429 is
£171,429 × (£548,667 ÷ £390,800) = £240,679
Grossing Stage 4 & Interaction Stage 5
Calculate the residue and chargeable estate.
| value transferred free estate | £1,000,000 | |
| Less specific gifts:- | ||
| to son (Interaction Stage 2) | £200,000 | |
| to daughter (grossing stage 3 | £240,679 | |
| Total chargeable gifts | £440,679 | |
| to widow (Interaction stage 3) | £285,714 | |
| Total specific gifts | £726,393 | |
| Residue | £273,607 | |
| half exempt | £136,804 | |
| half chargeable | £136,803 |
Interaction Stage 6
| Chargeable free estate | £1,000,000 | |
| Less exempt gifts to widow: | ||
| specific (Interaction Stage 3) | £285,714 | |
| residuary | £136,804 | |
| Total gifts to widow | £422,518 | |
| Chargeable free estate | £577,482 |
Total chargeable death estate (with lifetime cumulative total of £80,000 to be taken into account):
| Free estate | £577,482 |
| Settled property | £500,000 |
| Total | £1,077,482 |
