What is the grossing up of gifts for inheritance tax?

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## Grossing Up of Gifts for Inheritance Tax

### What the law says

**The statutory basis** for grossing up is found in **IHTA 1984, s.38**, which governs the attribution of value to specific gifts in partly-exempt transfers.

Under **s.38(1)**, the value transferred attributable to specific gifts corresponds to the value of those gifts. However, where a specific gift is chargeable (not exempt) and **does not bear its own tax** (i.e. the tax is paid from residue), the amount is "grossed up" — calculated as the amount arrived at under subsections (3) to (5).

- **s.38(3)** — Where the *only* chargeable gifts are specific gifts not bearing their own tax, the grossed-up amount is the aggregate of: (a) the sum of the value of those gifts, plus (b) the amount of tax that would be chargeable if the value transferred equalled that aggregate.

- **s.38(4)** — Where specific gifts not bearing their own tax are *not* the only chargeable gifts, the grossed-up amount is such amount as, after deduction of tax at the **assumed rate** (per s.38(5)), would equal the sum of the value of those gifts.

- **s.38(2)** — Where an exemption limit applies and gifts must be allocated, gifts bearing their own tax qualify for the exemption before gifts not bearing their own tax; otherwise gifts qualify in proportion to their values.

- **s.38(6)** — Disallowed but legally enforceable liabilities (e.g. under IHTA 1984, s.5(5) or FA 1986, s.103) are treated as specific gifts for grossing up purposes.

**Abatement**: Under **IHTA 1984, s.37(2)**, if after grossing up the total value of all specific gifts exceeds the value transferred (the free estate), the value of the specific gifts must be reduced (abated) so their total equals the value of the free estate, in accordance with any order in the Will and the general law of abatement.

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### HMRC guidance / practice

**What grossing up is**: Grossing up is the process of calculating the chargeable part of the estate under IHTA 1984, s.38 when the partly-exempt transfer rules apply and a chargeable beneficiary takes a specific gift **free of tax**. Although it involves tax calculations, it is part of the process of *valuing* the chargeable transfer, not the assessing process.

**Three types of grossing up calculation** exist:

| Type | When used |
|---|---|
| **Simple** | All chargeable specific gifts are free of tax *and* the residue is wholly exempt |
| **Four-stage** | There are chargeable specific gifts free of tax *and* chargeable specific gifts bearing their own tax, and/or the residue is wholly or partly chargeable |
| **'Benham'** | Very rare — where the testator provides for residuary beneficiaries to receive specified proportions *after* all IHT has been paid |

**Information needed before calculating**:
- The lifetime cumulative total
- The total value transferred at the relevant title
- The value of specific gifts split into three groups: (i) exempt gifts; (ii) chargeable specific gifts not bearing their own tax; (iii) chargeable specific gifts bearing their own tax
- The proportion of residue that is exempt

**Simple grossing up** applies where all chargeable gifts are specific gifts not bearing their own tax and there are no reliefs against tax. The gifts are grossed up at the rate appropriate to their total value, with slight variations depending on whether there is no lifetime cumulation, cumulation below the threshold, or cumulation above the threshold.

**Four-stage calculation** — Stage 4 (determining the final chargeable estate) involves: (J) totalling all chargeable specific gifts (grossed-up value plus those bearing their own tax); (K) adding exempt specific gifts; (L) deducting from the estate value to find residue; (M–N) identifying the chargeable part of residue; and (O) adding chargeable specific gifts to chargeable residue to arrive at the chargeable transfer.

**Separate titles**: Under IHTA 1984, s.40, where the death estate includes property chargeable under more than one title (e.g. free estate, settled property, joint property), each title is looked at separately and in isolation for grossing purposes.

**Worked example** (simple grossing, no lifetime cumulation, nil-rate band £234,000): Chargeable specific gifts free of tax = £264,000. Excess over nil-rate band = £30,000. Grossed up: £30,000 × (100 ÷ 60) = £50,000 + £234,000 = **£284,000** grossed-up value.

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Type	When used
Simple	All chargeable specific gifts are free of tax and the residue is wholly exempt
Four-stage	There are chargeable specific gifts free of tax and chargeable specific gifts bearing their own tax, and/or the residue is wholly or partly chargeable
'Benham'	Very rare — where the testator provides for residuary beneficiaries to receive specified proportions after all IHT has been paid