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HMRC internal manual

Inheritance Tax Manual

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


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

Gift to widow:

£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
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:

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 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