IHTM26129 | Step 4 - grossing up: grossing up where there are any reliefs due

If the tax on death is reduced by a relief against tax, such as Quick Succession Relief (QSR) (IHTM22041) or double taxation relief (DTR) (IHTM27161), you should give those reliefs before grossing up (IHTM26121).

Where the value transferred (IHTM04028) is reduced by a relief, such as Business Relief (IHTM25131) or Agricultural Relief (IHTM24001), the values you gross up are the values of the specific gifts after reduction under the interaction (IHTM26101) provisions.

The following examples all take QSR into account.

Example 1 - simple grossing

In this example the deceased died in September 2002. There is free estate of £1,000,000. The only chargeable legacies are free of tax legacies totalling £280,000. The residue is wholly exempt and there is no lifetime cumulation. QSR of £6,000 is due.

Chargeable legacies free of tax = £280,000

Less nil-rate band -£250,000

Excess = £30,000

£30,000 × (100 ÷ 60) = £50,000

Add nil-rate band +£250,000

Total = £300,000

Deduct QSR (100 ÷ 60), or £6,000 x (100 ÷ 60) = £10,000

Grossed-up legacies = £290,000

This can be easily checked:

Grossed-up legacies = £290,000

Less nil-rate band -£250,000

Excess = £40,000

Tax at 40% = £16,000

Less QSR -£6,000

Tax due = £10,000

£290,000 less £10,000 tax leaves £280,000 to pay the legacies.

Example 2

Using the same details as above, but with a lifetime cumulative total of £150,000, the calculation becomes:

Available nil-rate band = £250,000 less lifetime total (£150,0000 = £100,000

Chargeable legacies free of tax = £280,000

Deduct unused balance of nil-rate band -£100,000

Excess = £180,000

£180,000 × (100÷60) = £300,000

Add unused balance of nil-rate band +£100,000

Total = £400,000

Deduct QSR × (100 ÷ 60), or £6,000 × (5 ÷ 3) = £10,000

Grossed-up legacies = £390,000

This can be easily checked, as above:

Grossed-up legacies = £390,000

Plus lifetime cumulative total +£150,000

Total = £540,000

Less nil-rate band -£250,000

Excess = £290,000

Tax at 40% = £116,000

Less QSR -£6,000

Tax due = £110,000

£390,000 less £110,000 tax leaves £280,000 to pay the legacies.

Where the initial grossing addition is less than QSR × (100 ÷ 60) then the grossed-up value of the legacies will be the same as their value before grossing up. For example, in Example 1 above, the initial grossing addition is £300,000 - £280,000 = £20,000. If the QSR had been £15,000 instead of £6,000, the QSR × (100 ÷ 60) would be £25,000. As this is greater than the initial grossing addition of £20,000, the grossed-up value of the legacies would remain at £280,000.

Example 3 - four stage grossing

The facts are as in Example 1 above, except that only half the residue is exempt.

Stage 1

Gross up the legacies totalling £280,000 at the rate appropriate to their total value.

£250,000 + (£280,000 - £250,000) × (100 ÷ 60) = £300,000, less £6,000 (QSR) × (100 ÷ 60) = £290,000

Stage 2

Calculate the initial determination of the chargeable part of the estate:

Value of the estate = £1,000,000

Less grossed-up value of legacies -£290,000

Residue = £710,000

Value of exempt residue (50%) = £355,000

Value of chargeable residue (50%) = £355,000

The chargeable free estate is £290,000 + £355,000 = £645,000

Deduct nil-rate band -£250,000

Excess = £395,000

Tax at 40% = £158,000

Less QSR -£6,000

Net Tax due = £152,000

Stage 3

Re-gross the chargeable legacies

£280,000 × £645,000 ÷ (£645,000 - £152,000) = £366,328.60

Stage 4

Calculate the chargeable estate

Value of the estate = £1,000,000

Less grossed-up value of legacies -£366,328.60

Residue = £633,671.40

Value of exempt residue (50%) = £316,835.70

Value of chargeable residue (50%) = £316,835.70

The chargeable free estate is:

Value of the estate = £1,000,000

Less exempt residue -£316,835.70

Chargeable free estate = £683,164.30

You can check this by adding the chargeable gifts together

Grossed-up legacies = £366,328.60

Chargeable residue = £316,835.70

Total chargeable = £683,164.30

Any cases not covered by the above instructions should be referred to the Actuarial Team to help with the calculations.