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# 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 property £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 Stage1

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 Total BR £800,000 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 wife 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

£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 Nil rate band £234,000 Less lifetime cumulation £80,000 Equals unused threshold to be taken from reduced gift £154,000 £17,429 This figure × (100 ÷ 60) = £29,048 Add back unused threshold £154,000 Initial grossed up legacy £183,048

### Grossing Stage 2

Initial determination of the chargeable part of the estate:

 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 is chargeable £165,619 Total chargeable free estate £183,048 + £200,000 + £165,619 £548,667

### 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 cumulation net value £80,000 Chargeable death transfer £548,667 Total £628,667 Tax on that revised total After nil rate band of £234,000 = £157,867 Less tax on lifetime transfer at death rates Nil Tax on death estate £157,867

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.

 value transferred 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 to widow (Interaction stage 3) £285,714 Total specific gifts £726,393 Residue £273,607 half exempt £136,804 half chargeable £136,803

### Interaction Stage 6

 Chargeable free estate £1,000,000 Less exempt gifts to widow: specific (Interaction Stage 3) £285,714 residuary £136,804 Total gifts to widow £422,518 Chargeable free estate £577,482

Total chargeable death estate (with lifetime cumulative total of £80,000 to be taken into account):

 Free estate £577,482 Settled property £500,000 Total £1,077,482