SolvedIHTM26158 | Step 4 - four stage grossing calculations: example of a four stage calculation where interaction and settled property are also involved
From HM Revenue & Customs · Inheritance Tax Manual
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 = £1,800,000
Settled property = £500,000
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 assets = £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.
Interaction Stage 1
The value transferred (free estate only) is:
Value of the estate = £1,800,000
Less BR
On shares at 100% (£600,000)
On land at 50% (£200,000)
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 husband 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 husband:
£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
Less unused nil-rate band (£234,000 minus lifetime cumulative total of £80,000) = £154,000
Excess = £17,429 × (100 ÷ 60) = £29,048
Add back unused nil-rate band +£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 of residue is chargeable = £165,619
Total chargeable free estate = £548,667 (£183,048 + £200,000 + £165,619)
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 cumulative total = £80,000
Chargeable transfer on death = £548,667
Total = £628,667
Tax on that revised value (after nil-rate band of £234,000 deducted) = £157,867
Tax on death estate = £157,867 (no tax applicable to lifetime transfers)
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:
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
Specific gift to husband (Interaction Stage 3) £285,714
Total specific gifts = £726,393 (£200,000 + £240,679 + £285,714)
Residue = £273,607
Half exempt = £136,804
Half chargeable = £136,803
Interaction Stage 6
Free estate = £1,000,000
Less exempt gifts to husband
Specific (Interaction Stage 3) £285,714
Residuary £136,804
Total gifts to husband = £422,518
Chargeable free estate = £577,482
Total chargeable death estate (with lifetime cumulative total of £80,000 to be added):
Free estate £577,482
Settled property £500,000
Total = £1,077,482