IHTM26157 - Step 4 - four stage grossing calculations: example of a four stage calculation
The following example is a straightforward four stage (IHTM26152) grossing calculation involving an estate with property at only one title (IHTM26211), no lifetime cumulation (IHTM31413) and no interaction (IHTM26101). A more complex calculation where these aspects are involved can be found at IHTM26158.
Example 1
June dies in November 2000
She leaves free Estate of £1.6M. No relievable property. No lifetime cumulation and no other property chargeable on the death.
By Will
- House and chattels (total value £200,000) to surviving spouse
- Legacies of £147,000 free of tax each to the two children
Residue
- Half to the surviving spouse
- Half equally between the two children.
Stage 1
Gross up the legacies totalling £294,000 to the children at the rate appropriate to their total value.
£234,000 + ((100 ÷ 60) x (£294,000 - £234,000)) = £334,000
Stage 2
Calculate the initial determination of the chargeable part of the estate.
Value of the estate = £1,600,000
Grossed up value of chargeable specific gifts = £334,000
Exempt specific gifts = £200,000
Residue = £1,066,000 (£1,600,000 - £534,000 total specific gifts)
Value of half exempt residue = £533,000
Value of half chargeable residue = £533,000
The chargeable free estate is £334,000 + £533,000 = £867,000
Stage 3
Re-gross the chargeable specific legacies
Chargeable free estate = £867,000
Tax on £867,000 (after nil-rate band) = £253,200
Chargeable estate net of tax = £613,800
The gross equivalent of £294,000 is £294,000 × (£867,000 ÷ £613,800) = £415,279
Stage 4
Calculate the chargeable estate.
Value of the estate = £1,600,000
Less grossed-up value of chargeable specific gifts £415,279
Exempt specific gifts £200,000
Total specific gifts = £615,279
Residue = £984,721 (£1,600,000 - £615,279)
Value of half exempt residue = £492,361
Value of half chargeable residue = £492,360
The chargeable free estate is:
Value of the estate = £1,600,000
Less exempt gifts to spouse £692,361 (£200,000 specific and £492,361 residue)
Chargeable estate = £907,639
(You can check this final step by adding together the chargeable gifts. £415,279 specific and £492,360 residue totals £907,639.)