IHTM42118 | Proportionate charges: grossing

You need to consider grossing up the chargeable amount when the tax is being paid by the trustees.

That is because the beneficiary is receiving a sum that is net of tax and by grossing up you are calculating the full loss to the trust, which is subject to Inheritance Tax (IHT).

Grossing does not apply to a proportionate charge

• If the tax is not being paid by the trustees

• If the tax is being paid by the trustees from non-relevant property remaining in the trust

• If the trust comes to an end as a result of the distribution (or there is no longer any relevant property in the trust).

Remember grossing up does not apply to the ten year anniversary charge

The grossing process

Once you know the rate of the IHT on a proportionate charge then the process is simple.

For example, if the final rate (after applying the appropriate fraction and any rate relief) is 2% and the value appointed to the beneficiary is £100,000 and the trustees are paying the tax then the gross value is

£100,000 ÷ (100% - 2%) = 100,000 ÷ 98% = £102,041

So, the beneficiary received £100,000 net of IHT. The gross transfer is £102,041 (the full amount leaving the trust) and the IHT on that amount is £2,041.

The grossing addition is always equal to the tax (i.e. £102,041 x 2% = £2,041 tax)

What if the property subject to the charge is being charged at different rates?

In such cases you apply the process above to each part. For example, if £50,000 of the amount above had only been in the trust for half of the time and is only being charged at 1% then you do two grossing calculations.

£50,000 ÷ (100% - 1%) = £50,000 ÷ 99% = £50,505 (IHT £505)

And for the rest

£50,000 ÷ (100% - 2%) = £50,000 ÷ 98% = £51,020 (IHT £1,020)

The total gross transfer is £101,525 and the IHT is £1,525 and the difference equals the net amount of £100,000 given to the beneficiary.