»Ê¹ÚÌåÓýapp

Where both grossing up and interaction apply, the value of any specific gifts left free of tax will affect the calculation of the baseline and since interaction will reduce the value of those gifts before they are grossed up, it is necessary to go through the full set of calculations to arrive at both the baseline and the donated amount.

Example

Roland died on 15 September 2012, leaving an estate valued at £1.5m after deduction of liabilities. His cumulative total of lifetime transfers is £200,000. His Will leaves legacies of

£300,000 to his son, free of tax,

Unlisted shares to his daughter, valued at £200,000 that qualify for 100% business relief, and

£35,000 to the Scout Association.

»Ê¹ÚÌåÓýapp residue is left as to 10% to the National Trust and the remainder to his children equally. It includes a land that qualifies for 100% agricultural relief valued at £150,000. He is entitled to an interest in possession under his wife’s Will valued at £700,000 which passes to his children absolutely.

»Ê¹ÚÌåÓýapp calculation taking both interaction and grossing up (IHTM26158) into account, is as follows.

Interaction stage 1

Calculate the value transferred after relief

Gross value of free estate = £1,500,000

Less business relief on shares -£200,000

Less agricultural relief on land -£150,000

Value transferred = £1,150,000

Interaction stage 2

»Ê¹ÚÌåÓýappre is one gift of relievable property, being the gift of shares to the daughter. This is taken at its value after relief at 100% or £0.

Interaction stage 3

»Ê¹ÚÌåÓýappre is other relievable property (the land), so the specific gift to the son must be reduced by the IHTA84/S39(4) fraction, although for the purposes of calculating the donated amount, the gift to the Scout Association remains at full value (IHTM45031). »Ê¹ÚÌåÓýapp fraction is based solely on the value of the Free Estate and ignores the cumulative total and settled property.

»Ê¹ÚÌåÓýapp fraction (IHTM26103) is

(£1,150,000 - nil) ÷ (£1,500,000 - £200,000)

So, the value of gifts is reduced to:

Charity: £35,000 × (£1,150,000 ÷ £1,300,000) = £30,962

Son: £300,000 × (£1,150,000 ÷ £1,300,000) = £265,385

Interaction stage 4

»Ê¹ÚÌåÓýapp gift to the son is free of tax and so the reduced value of the gift must be grossed up. As these calculations are being performed to see whether the 10% test is being met, you should use the grossing calculator with the 36% rate. »Ê¹ÚÌåÓýapp lifetime cumulative total is taken into account but the settled property is ignored.

Grossing up stage 1

»Ê¹ÚÌåÓýapp legacy of £265,385 is grossed up at its own rate. »Ê¹ÚÌåÓýapp available nil-rate band is £125,000. »Ê¹ÚÌåÓýapp calculation is:

Net value of legacy = £265,385

Less available nil-rate band -£125,000

Excess over nil-rate band = £140,385

Gross up excess at (100 ÷ 64) = £219,352

Add back available nil-rate band +£125,000

Initial grossed-up value = £344,351

Grossing up stage 2

Initial determination of the chargeable part of the estate:

Value of free estate after relief = £1,150,000

Less grossed-up value of gift to son -£344,351

Less unlisted shares to daughter £0

Less charitable legacy - £30,962

Residue = £774,687

10% of residue is exempt -£77,469

Chargeable residue = £697,218

Initial chargeable estate is £697,218 + £344,351 = £1,041,569.

Grossing up stage 3

»Ê¹ÚÌåÓýapp son’s legacy at its reduced value of £265,385 is grossed up again at the rate appropriate to the initial chargeable estate taking the cumulative total of lifetime transfers into account and tax due at 36%:

Initial chargeable estate = £1,041,569

Tax on initial estate (£1,041,569 - £125,000 x 36%) = £329,965

Gross up legacy at estate rate (£265,385 x (£1,041,569 ÷ (£1,041,569 - £329,965)) = £388,442

Grossing up stage 4 & Interaction stage 5

Calculate the residue and chargeable estate:

Value of free estate after relief = £1,050,000

Less gift to son -£388,442

Less gift to charity -£30,962

Residue = £730,596

Exempt share of residue (10%) = £73,060

»Ê¹ÚÌåÓýapp donated amount, after interaction, is revised to £73,060 + £35,000 = £108,060.

»Ê¹ÚÌåÓýapp calculation of the baseline is then:

Estate on death = £1,500,000

Business relief -£200,000

Agricultural relief - £150,000

Charitable legacies -£108,060

Chargeable transfer = £1,041,940 (step 1)

Less apportioned nil-rate band -£74,769

Step 2 amount = £967,171

Add back legacy to charity +£108,060

Baseline amount = £1,075,231 (step 3)

»Ê¹ÚÌåÓýapp charitable giving condition (IHTM45002) or 10% test requires that the donated amount is at least 10% of the baseline amount or £107,523. At £108,060, the donated amount meets this test, so the estate qualifies for the reduced rate of 36%.

If the estate fails to qualify for the reduced rate, you should recalculate the position from scratch using the full rate grossing up calculator and reducing both chargeable and exempt specific legacies.