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Inheritance Tax Manual

HM Revenue & Customs
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Reduced rate for gifts to charity: the charitable giving condition or 10% test: example with two estate components, a lifetime cumulative total and where grossing up and interaction apply

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.


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.

The 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.

The 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
agricultural relief on land -£150,000
Value transferred £1,150,000

Interaction stage 2

There 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

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

The 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

The 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 reduced rate grossing calculator (IHTM45030). The lifetime cumulative total is taken into account; but the settled property is ignored.

Grossing up stage 1

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

Net value of legacy £265,385
Less available nil-rate band -£125,000
Excess over nil-rate band £140,385
Gross up at (100 ÷ 64) £219,352
Add back 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 gift to son -£344,351
unlisted shares to daughter  
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 , 0 4 1 , 5 6 9.

Grossing up stage 3

The 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)@36% £329,965
Gross up legacy at estate rate (£265,385 x (£1,041,569 ÷ (£1,041,569 9 £328,965)) £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
gift to charity -£30,962
Residue £730,596
Exempt share of residue (10%) £73,060

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

The 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  
  £967,171 (step 2)
Add back legacy to charity £108,060  
Baseline amount £1,075,231 (step 3)

The 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.