# IHTM45032 - Reduced rate for gifts to charity: the charitable giving condition or 10% test: example with two estate components, a lifetime cumulative total and where grossing up and interaction apply

Where both grossing up and interaction apply, the value of any specific gifts left free of tax will affect the calculation of the baseline and since interaction will reduce the value of those gifts before they are grossed up, it is necessary to go through the full set of calculations to arrive at both the baseline and the donated amount.

## Example

Roland died on 15 September 2012, leaving an estate valued at £1.5m after deduction of liabilities. His cumulative total of lifetime transfers is £200,000. His Will leaves legacies of

£300,000 to his son, free of tax,

Unlisted shares to his daughter, valued at £200,000 that qualify for 100% business relief, and

£35,000 to the Scout Association.

The residue is left as to 10% to the National Trust and the remainder to his children equally. It includes a land that qualifies for 100% agricultural relief valued at £150,000. He is entitled to an interest in possession under his wife’s Will valued at £700,000 which passes to his children absolutely.

The calculation taking both interaction and grossing up (IHTM26158) into account, is as follows.

### Interaction stage 1

Calculate the value transferred after relief

 Gross value of free estate £1,500,000 Less business relief on shares -£200,000 agricultural relief on land -£150,000 Value transferred £1,150,000

### Interaction stage 2

There is one gift of relievable property; being the gift of shares to the daughter; this is taken at its value after relief at 100% or £0.

### Interaction stage 3

There is other relievable property (the land), so the specific gift to the son must be reduced by the IHTA84/S39(4) fraction, although or the purposes of calculating the donated amount, the gift to the Scout Association remains at full value (IHTM45031). The fraction is based solely on the value of the Free Estate and ignores the cumulative total and settled property.

The fraction (IHTM26103) is

(£1,150,000 - nil) ÷ (£1,500,000 - £200,000)

So the value of gifts is reduced to:

Charity: £35,000 × (£1,150,000 ÷ £1,300,000) = 30,962

Son: £300,000 × (£1,150,000 ÷ £1,300,000) = £265,385

### Interaction stage 4

The gift to the son is free of tax and so the reduced value of the gift must be grossed up. As these calculations are being performed to see whether the 10% test is being met, you should use the reduced rate grossing calculator (IHTM45030). The lifetime cumulative total is taken into account; but the settled property is ignored.

### Grossing up stage 1

The legacy of £265,385 is grossed up at its own rate. The available nil-rate band is £125,000. The calculation is

 Net value of legacy £265,385 Less available nil-rate band -£125,000 Excess over nil-rate band £140,385 Gross up at (100 ÷ 64) £219,352 Add back nil-rate band £125,000 Initial grossed up value £344,351

### Grossing up stage 2

Initial determination of the chargeable part of the estate

 Value of free estate after relief £1,150,000 Less grossed up gift to son -£344,351 unlisted shares to daughter 0 charitable legacy -£30,962 Residue £774,687 10% of residue is exempt -£77,469 Chargeable residue £697,218

Initial chargeable estate is £697,218 + £344,351 = £1 , 0 4 1 , 5 6 9.

### Grossing up stage 3

The son’s legacy at its reduced value of £265,385 is grossed up again at the rate appropriate to the initial chargeable estate taking the cumulative total of lifetime transfers into account and tax due at 36%.

 Initial chargeable estate £1,041,569 Tax on initial estate (£1,041,569 - £125,000)@36% £329,965 Gross up legacy at estate rate (£265,385 x (£1,041,569 ÷ (£1,041,569 9 £328,965)) £388,442

### Grossing up stage 4 & Interaction stage 5

Calculate the residue and chargeable estate

 Value of free estate after relief £1,050,000 Less gift to son -£388,442 gift to charity -£30,962 Residue £730,596 Exempt share of residue (10%) £73,060

The donated amount, after interaction, is revised to £73,060 + £35,000 = £108,060

The calculation of the baseline is then

 Estate on death £1,500,000 Business relief -£200,000 Agricultural relief -£150,000 Charitable legacies -£108,060 Chargeable transfer £1,041,940 (step 1) Less apportioned nil-rate band -£74,769 £967,171 (step 2) Add back legacy to charity £108,060 Baseline amount £1,075,231 (step 3)

The charitable giving condition (IHTM45002) or 10% test requires that the donated amount is at least 10% of the baseline amount or £107,523. At £108,060, the donated amount meets this test, so the estate qualifies for the reduced rate of 36%.

If the estate fails to qualify for the reduced rate, you should recalculate the position from scratch using the full rate grossing up calculator and reducing both chargeable and exempt specific legacies.