Property at more than one title: example of the effect of S40
As well as the example below further examples may be found in the instructions on interaction (IHTM26101) and grossing up (IHTM26121). For an example including both interaction and grossing refer to IHTM26158.
Tanya died in August 2002 leaving an estate of £500,000. By Will Tanya left a legacy of £300,000 free of tax to Xavier, a chargeable beneficiary, and the rest of the estate to a qualifying charity. There is no business relief (BR) (IHTM25131) or agricultural relief (AR) (IHTM24001).
Tanya was also life tenant of settled property (IHTM16000) valued at £2M. The trust property includes agricultural property (IHTM24030) qualifying for AR. The trust passes to a chargeable beneficiary.
The effect of S40 on the calculation of Xavier’s £300,000 legacy is:
- There is no interaction because there is no BR or AR in the free estate and the AR on the settled property is irrelevant.
- The £300,000 is grossed up at its own rate and, for grossing purposes, the settled property is ignored.
Consequently the grossed up value of the £200,000 legacy is £233,333.
The grossing calculation is
|Less whole of the threshold||£250,000|
|Excess of £50,000 ×(100 ÷ 60) =||£83,333|
|Add the threshold||£250,000|
|Grossed up value of legacy||£333,333|
The chargeable estate on Tanya’s death is £333,333 plus the value of the settled fund after AR. Tax is assessed accordingly.