IHTM26158 - Step 4 - four stage grossing calculations: example of a four stage calculation where interaction and settled property are also involved

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