SolvedIHTM26142 | Step 4 - simple grossing calculations: calculation when there is no lifetime cumulation
From HM Revenue & Customs · Inheritance Tax Manual
If there is no lifetime cumulation (IHTM31413) and the conditions at IHTM26131 are satisfied, the grossed-up value of the chargeable specific gifts (IHTM26011) is
the threshold at the date of death, plus
The amount by which the total value of the chargeable specific gifts exceed the threshold × (100 ÷ 60)
Example 1 (includes settled property)
Trevor died on 1 May 2000. The IHT400 (IHTM10021) shows a free estate of £600,000. There is no relievable property and no lifetime cumulation, but there is chargeable settled property valued at £250,000.
By Will (IHTM12041)
£88,000 free of tax to each of Trevor’s three children
£5,000 to a charity absolutely
The chargeable specific gifts which do not bear their own tax total £264,000. There are no other chargeable gifts in the free estate.
The grossing calculation is:
Total value of chargeable specific gifts = £264,000
Less whole of nil-rate band -£234,000
Excess = £30,000
£30,000 × (100 ÷ 60) = £50,000
Add the nil-rate band +£234,000
Grossed-up value of the chargeable gifts = £284,000
You can easily check the result:
Tax at 40% on £284,000 - £234,000 = £20,000
Add value of the specific gift +£264,000
Chargeable gift = £284,000
The total chargeable transfer on death is
Grossed up value of the chargeable gift = £284,000
Settled property = £250,000
Total chargeable transfer = £534,000
As Trevor died on 1 May 2000 a calculation would show tax on the death estate of £534,000 as £120,000 of which £63,820.22 is attributable to the free estate. Because of the settled property, the tax liability is greater than the grossing addition.
As the estate as returned is clearly sufficient to pay the legacies (including that to the charity) and tax, there is no need to consider its value.
Example 2 (includes relievable property)
Tina died 1 October 2001. She left free estate of £1M, including unlisted shares valued at £500,000 which qualify for business relief at 100%. No lifetime cumulation. No other property chargeable on the death.
By Will
£150,000 free of tax to each of Tina’s four children
residue to Tina’s spouse absolutely.
Applying the 6 stages (IHTM26104)
Stage 1
The value transferred after BR is £500,000.
Stage 2
There are no specific gifts of relievable property.
Stage 3
The pecuniary legacies totalling £600,000 have to be reduced by £500,000 ÷ £1,000,000
(the IHTA84/S39A(4) fraction) (IHTM26101) to £300,000.
Stage 4
The chargeable legacies as reduced to £300,000 have to be grossed up. They gross up to (100 ÷ 60) × (£300,000 - £242,000) + £242,000 = £338,667.
Stages 5 & 6
The chargeable transfer is £338,667 and the residue (£161,333) is exempt.