HMRC grossing up query

(b.poulter) #1

Can anyone help with a grossing up query. It has us stumped here?

Scenario is this. A dies, full NRB available. Estate worth £2m Will leaves 2 properties to spouse, cash legacies free of tax totalling £60000 and then residue 60% spouse and 40% daughter. HMRC have grossed up the cash legacies and said more tax is due.

From the forms HMRC have sent me this seems correct but I was thinking about it and it seems that the cash legacies are payable first from the estate and although stated as being free of tax would then use the first part of the nil rate band. Then the balance of the nil rate band applies against the part of the estate passing to the daughter. No one other than the spouse benefits from the spouse exemption in this example.

Am I missing something fundamental here?

Thanks in advance.

Belinda Poulter
Crombie Wilkinson Solicitors LLP

(Tim Gibbons) #2

So far as the tax is concerned there is no difference in priority between legacies and residue- the tax is by sec 4 IHTA is charged on the estate as if the deceased had immediately before his death made a transfer of value equal to the value of the estate – the value being subject, of course, to the subtraction of that part which is to pass to exempt beneficiaries.

Tim Gibbons

(mullenky) #3

Belinda, it may help if you think of a legacy “free of tax” as actually being a legacy of such a sum as, after deduction of the tax attributable thereto, leaves a “net” legacy of, in this case, £60,000.

The grossed up legacy thus reduces the amount available as residue, so reduces the amount eligible for spouse relief.

Also, you may need to show this in the final estate accounts, so these make sense to the beneficiaries; eg

Total to distribute £XXXXXXX
Less Legacies £60,000
IHT on legacies £TTTTT

Net Residue £YYYYYYY

60% Spouse £SSSSSS

Less IHT thereon £RRRRR
Daughter £DDDDDD

Kevin Mullen

(Graeme Lindop) #4

HMRC are correct. The issue here is that the spouse has to bear a proportion of the tax relating to the cash free legacies. Therefore, this will reduce the amount of the exemption available on the share of residue passing to the spouse. HMRC do have a very good calculator on their website:

This will do all the work for you on the double grossing.

Graeme Lindop
Coles Miller Solicitors LLP

(ianmckeever) #5

It may help to just divide the estate into two parts; the tax free part, and the taxable part and calculate the tax based on that.

In many ways everything else is just detail, at least in so far as relates to the amount of tax payable.

Ian McKeever

Ian McKeever & Co Consulting Actuaries.

(Jade Gani) #6

Kevin explains the approach very well and I trust this answers your query. The calculator Graeme provides a link for is useful but in a recent case of mine I have proven to HMRC it isn’t always 100% accurate (though very close). The HMRC agreed my long form calculation instead - but it is quite time consuming to do!

Jade Gani
Aston Bond

(Dale Ross) #7

I note Jade’s comment that the HMRC calculator is inaccurate. I have also found the calculator itself to be accurate. The problem is that the statutory method prescribed for double grossing up in section 38 IHTA 1984 is inaccurate. It is an approximation to the “perfect” grossing up, which prior to availability of spreadsheets and computers would have been daunting. Rather than a double grossing up, a seven or eight fold grossing up process would arrive at an answer which is perfect to the nearest penny. Fortunately, the approximation always works in the taxpayer’s favour.

One consequence of the approximation is that if the tax is apportioned to the grossed up legacies and other chargeable elements, then the grossed up legacy net of tax will not be exactly equal to the specified legacy.

For example, consider a testator with a £1 million estate and a full single nil rate band. There is a chargeable legacy of £500,000 “free of tax” and residue passes half to spouse, half to daughter.

The statutory method, per HMRC’s calculator, apportioned to the chargeable elements gives


legacy (grossed up) 657,181.57 159,765.51
chargeable residue 171,409.21 41,670.80
total chargeable 828,590.79 201,436.31

£657,181.57 - £159,765.51 = £497,416.06, which is not equal to £500,000.

The perfect calculation would be as follows
legacy (grossed up) 660,902.35 160,902.35
chargeable residue 169,548.82 41,278.12
total chargeable 830,451.17 202,180.47

£660,902.35 - £160,902.35 = £500,000.00.

The HMRC calculator does give the first solution, which is correct, being the imperfect method prescribed by statute.

Dale Ross
Firm: Blackadders LLP