Grossing up calculations

By Tolley

The following Trusts and Inheritance Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

Grossing up calculations
The partial exemption problem
When does single grossing apply?
Single grossing calculation
When does double grossing apply?
Double grossing calculation

This guidance note should be read in conjunction with the illustrative Grossing up calculations examples.

The partial exemption problem

Bequests in a Will may be broadly divided into:

•specific gifts, which are gifts of a particular item or an amount of money, and
•residuary gifts, which are comprised of what is left after payment of all debts, expenses, specific gifts and taxes

Specific gifts may be chargeable or exempt. The tax on chargeable specific gifts is paid out of residue unless:

•the property which forms the basis of the gift is not in the UK, or
•there is a contrary direction in the Will

Residuary gifts may also be chargeable or exempt. An exempt residuary gift does not bear any of the tax attributable to residue but it does bear part or all of the tax attributable to chargeable specific gifts.

See the Incidence of tax on specific gifts and Incidence of tax on residuary gifts guidance notes.

In order to calculate residue one needs to know how much tax it will have to bear. The calculation of IHT on the whole estate depends on how much of it is exempt. So there is a circular problem.

The problem is handled by calculating the tax on chargeable specific gifts using a grossing up method and then deducting the gross value of the specific gifts in order to calculate the amount of residue and consequently the extent of the exemption.

IHTA 1984, s 38

The approach is fairly straightforward where the residue is wholly exempt and it is to bear all of the tax on chargeable specific