I am dealing with an estate whereby 36% of residue passes to charity, 64% to non-exempt beneficiaries. The estate is worth £1.4 million and only 1 NRB available of £325,000.
2 small cash legacies of £1000 to a church and £200 to a friend of the deceased.
I seem to be going around in circles with the grossing up and ensuring that I deal with this accordingly in the final distributions.
Does anyone have any useful guidance, or practical examples, other than what can be found on HMRC, PLC etc?
On the one occasion I have had to do these calculations (which were a nightmare), and with abatements, I set up an Excel spreadsheet with the fixed values of assets and beneficiaries’ %age shares, and then set up all the formulae to apportion the asset values between the beneficiaries and the abatements. I then set up calculations, pulling in the results of the first set of calculations, for abated total less charitable exemptions, NRB, IHT etc and then going into the Data tab used Data/What if analysis/Goal seek to do the final step. The figure in the spreadsheet which I found using goal seek, ie the variable on which other figures depended and which was not represented by a formula, was the abated total for one of the charities. From this everything else comes if you have set up the correct formulae. If you have no abatements you will be able to cut out that section of the calculations. I think you have to use goal seek as there are too many variables (hence the going round in circles) to do it otherwise. I have to say I spent hours doing it and it made my head spin.
I found some very helpful examples of the structure of the calculations in Tolley Guidance.
In your case Matthew there will be no grossing up as the only legacy, which I assume is given free of tax, is the £200 to the friend. Therefore you just calculate the liability at 36% after deducting the exempt legacy of £1000 given to the church and the share of residue given to the charities and the liability then falls upon the non-exempt beneficiaries. If the testator had given free of tax legacies to non-exempt beneficiaries which exceeded the nil rate band, then grossing up would apply and you would need to use the revenues online calculator to make life easy.
I have had second thoughts about my reply. As residue is shared by exempt and non-exempt beneficiaries, the £200 legacy given to the friend will indeed have to be grossed up and the taxable proportion attributable to this will be payable pro rata by the charities and the non-exempt beneficiaries. My reply would’ve been correct if the whole of residue passed to charities. Sorry.
My understanding is that because there are free of tax legacies and the residue is left to non-exempt and exempt beneficiaries, double grossing up is required, even though the free of tax legacy is below the NRB, as it is the total amount left to non-exempt beneficiaries that is important.
In this case I believe that there would be approx. £59 IHT payable from the general estate in respect of the free of tax legacy and approx. £205,000 IHT due in respect of and payable from the non-exempt beneficaries’ share of the residuary estate.
Double grossing up is certainly required, but have you been using HMRC’s grossing up calculator?
It only takes a minute or so to enter your figures and do the calculation. Assuming no lifetime transfers, it comes up with a chargeable estate of £895,453.43, which includes £259.52 for the grossed up cash legacy and £895,193.91 for the chargeable residue.
That takes care of the difficult part. You can then calculate the IHT. The £59.52 IHT on the grossed up legacy needs to be shared by all the chargeable and non chargeable residue i.e. only deduct this small part of the IHT in your account before calculating the residue. The rest of the IHT falls on the chargeable residue, apportioned among those particular beneficiaries.