Free of Tax Legacies: How IHT Is Allocated in Your Will
“Free of tax” sounds simple — but it silently shifts the IHT burden onto your residuary beneficiaries and requires grossing up. A £60,000 free-of-tax gift can cost the estate £100,000.
Free-of-Tax vs Subject-to-Tax: Quick Comparison
| Feature | Free of tax | Subject to tax |
|---|---|---|
| Who bears the IHT on the legacy? | The residue (residuary beneficiaries) | The beneficiary of the legacy |
| What does the beneficiary receive? | The full stated amount | The stated amount less their share of IHT |
| Effect on residue? | Residue reduced by legacy + its IHT (grossed up) | Residue reduced by legacy only |
| Grossing up required? | Yes — to find true cost to estate | No — legacy bears its own IHT proportionally |
| Default rule (will silent) for cash legacies? | Yes — cash legacies are free of tax by default under s211 IHTA 1984 | Not default for cash legacies |
| Better when residue goes to… | Exempt beneficiaries (charity, spouse) | Taxable individuals (children, friends) |
Grossing Up: Worked Example
A will leaves £60,000 free of tax to a nephew. The entire gift is above the nil-rate band (IHT at 40%).
Net legacy: £60,000
Grossed-up value: £60,000 ÷ (1 − 0.40) = £60,000 ÷ 0.60 = £100,000
IHT at 40% on £100,000: £40,000
Total cost to estate: £100,000 (to give the nephew £60,000)
The residue is reduced by £100,000 — not just £60,000 — to fund one free-of-tax legacy.
Frequently Asked Questions
What is a 'free of tax' legacy in a will?
A 'free of tax' legacy (also called a 'free of inheritance tax' legacy) is one where the will expressly says the beneficiary is to receive the stated amount clear of any IHT. The IHT attributable to that gift is then borne by the residue of the estate — rather than being deducted from the legacy itself. Example: a will leaves '£50,000 free of tax to my nephew'. The nephew receives £50,000. The IHT cost of that gift (if the estate is above the nil-rate band threshold) is paid from the residue before the residuary beneficiaries receive anything. The residue is effectively reduced by both the £50,000 and by the IHT attributable to the gift. The default rule under English law (where the will is silent) is that a specific cash legacy is paid 'free of tax' — the beneficiary gets the stated sum; IHT comes from residue. For residue: the residuary beneficiaries bear the IHT on the residue itself.
What does 'subject to tax' or 'bearing its own tax' mean for a legacy?
A 'subject to tax' legacy (or a legacy 'bearing its own IHT') means the beneficiary receives the stated amount minus a proportionate share of the IHT attributable to that gift. The IHT is deducted from the legacy before payment to the beneficiary. Example: a will leaves '£50,000 subject to tax to my nephew'. If the effective IHT rate on that gift is 40%, the nephew receives £50,000 less their proportionate IHT, ending up with £30,000. This is less common in practice — most wills either state 'free of tax' explicitly or rely on the default rule (cash legacies free of tax). 'Subject to tax' provisions are sometimes used where the testator wishes to reduce the burden on the residue — particularly useful when the residue is going to a charity (exempt from IHT) and specific legacies are going to taxable individuals.
What is 'grossing up' and why does it matter for free-of-tax legacies?
When a legacy is free of tax, the IHT on that legacy is paid from residue. But calculating the IHT requires knowing the gross chargeable value of the legacy — which in turn depends on how much IHT is payable. This creates a circular calculation, solved by 'grossing up'. Formula (for a legacy at 40% IHT, assuming all of it is taxable above the nil-rate band): Gross value = Net legacy ÷ (1 − 0.40) = Net legacy × 100/60. Example: a free-of-tax legacy of £60,000. Grossed-up value = £60,000 ÷ 0.60 = £100,000. IHT on that £100,000 at 40% = £40,000. So the estate pays £60,000 to the beneficiary AND £40,000 in IHT — total cost to the estate is £100,000 for a £60,000 net gift. The residue is reduced by £100,000 (not just £60,000) to fund a single free-of-tax legacy. When there are multiple free-of-tax legacies, the grossing-up calculation applies to all of them collectively.
What is the default IHT allocation rule when a will is silent?
When a will makes no express provision about who bears the IHT, the default rules under s211 IHTA 1984 apply: (1) Specific legacies (cash or specific items): the IHT on those legacies is borne by the residue. In effect, specific legacies are treated as 'free of tax' by default. The beneficiary receives the stated amount in full; (2) Residue: the IHT attributable to the residue is paid from the residue before distribution. The residuary beneficiaries bear the IHT on their share in proportion; (3) Property passing outside the estate (joint tenancies, trust assets, pension nominations): the IHT on these is generally borne by the estate unless there is specific agreement or will provision. Practical implication: if you leave large specific cash legacies and a small residue, the IHT on those legacies may eat into or eliminate the residue entirely — a common and easily avoided mistake with proper will drafting.
How does the choice between free-of-tax and subject-to-tax affect the residuary beneficiaries?
The allocation of IHT between specific legacies and residue can dramatically change what the residuary beneficiaries receive. Example illustrating the impact: Estate value £1,000,000. NRB available £325,000. Taxable estate: £675,000. IHT at 40%: £270,000. Scenario A — the will leaves a '£500,000 free-of-tax' legacy to child A, and the residue to child B: grossed-up value of the legacy is approximately £833,333 (at 40% IHT), leaving only £166,667 gross residue for child B, and the grossing-up IHT eats further into this. Child B may receive substantially less than £500,000. Scenario B — the will leaves a '£500,000 subject to tax' legacy to child A and the residue to child B: child A bears their proportionate IHT (roughly £270,000 × 500/1,000 = £135,000) and receives £365,000; child B bears the IHT on the residue (£500,000 × 135/1,000) and receives more than under Scenario A. Proper will drafting should specify IHT allocation and consider the actual IHT impact on each beneficiary's share.
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