Step 4 - grossing up: how to decide whether specific gifts out of settled property bear their own tax
Settled property (IHTM16000) in which the deceased had a qualifying interest in possession (IHTM16062) may, on the death, be divided into specific (IHTM26011) and residuary gifts (IHTM26003) under the terms of the settlement. Where this is so, the general rule is the reverse of that in the free estate. The specific gifts out of the settled property bear their own tax - that is a rateable proportion of the tax payable on that settled fund on the death - and so should not be grossed up unless the settlement provides that they should be tax free. For this to be the position where the settlement was made by Will (IHTM12041), it has to show a clear intention that future tax on the death of the deceased life tenant (and not just tax on the settlor’s own death) is to be borne by residue.
Property is settled on trust for Lisa for life and on Lisa’s death
- £200,000 to a chargeable beneficiary absolutely
- residue to a charity
There is no provision in the settlement about the tax payable on Lisa’s death.
The £200,000 legacy bears its own tax. You should not gross it up.