Grossing Up Inheritance Tax: What It Is and How It Works

When a will says a legacy is “free of tax”, it means the beneficiary receives the stated amount without any deduction for inheritance tax — and the residue bears the IHT instead. This sounds straightforward, but it creates a mathematical complication: the tax is calculated on a figure that includes the tax itself. HMRC calls this process grossing up.

This guide explains why grossing up arises, how the calculation works, and why “free of tax” legacies can be more expensive than they appear.

Why does grossing up arise?

Under s.211 Inheritance Tax Act 1984 (IHTA 1984), inheritance tax on the free estate (assets passing under the will or on intestacy) is payable out of the residue — unless the will specifies otherwise. General legacies are treated as “subject to tax” by default: the legatee bears their own tax, so a £50,000 legacy effectively delivers £50,000 minus the IHT attributable to that gift.

But some wills expressly make a legacy “free of tax” — meaning the residue must foot the IHT bill on behalf of the legatee. When this happens, the £50,000 legacy is no longer the whole story: the residue is effectively giving the legatee £50,000 plus the IHT on £50,000.

To calculate the correct IHT, HMRC must find the “gross equivalent” of the net legacy — the amount that, after tax at 40%, leaves the legatee with exactly the net figure stated in the will. That process is grossing up.

The grossing-up formula

Where IHT is charged at the standard 40% rate, the gross equivalent of a net-of-tax legacy is:

Or equivalently:

The IHT payable on the gross amount is then Gross − Net.

Worked example 1: simple case

Suppose an estate has a net (post-debt) value of £800,000. The nil-rate band is £325,000 and there is no residence nil-rate band. The will leaves “£100,000 free of tax to my friend Sarah”, with the residue to the testator’s children.

Without grossing up, you might naively calculate IHT on £800,000 − £325,000 = £475,000 × 40% = £190,000. But that ignores the fact that Sarah’s legacy is free of tax.

The correct approach:

1. Gross up the free-of-tax legacy. Sarah receives £100,000 net. Gross equivalent = £100,000 ÷ 0.6 = £166,667.
2. Add to the residue to find taxable estate. The total chargeable estate is treated as (£800,000 − £100,000 residue + £166,667 gross legacy) = £866,667 in estate value terms, but for the IHT calculation we use the grossed-up legacy in place of the net legacy.
3. Calculate IHT. Taxable above nil-rate band = (£800,000 with the grossed-up legacy reintroduced) less nil-rate band. In practice HMRC uses the formula: IHT = (Net estate − NRB − net legacy) × 40/60, where the legacy is free of tax.
   
   IHT on free-of-tax legacy = £100,000 × 40/60 = £66,667.
   Remaining estate after the net legacy = £800,000 − £100,000 = £700,000.
   Taxable residue above NRB = £700,000 − £325,000 = £375,000 × 40% = £150,000.
   Total IHT = £66,667 + £150,000 = £216,667.

Compare this with the position if the legacy were simply “subject to tax”: Sarah would receive £100,000 minus her proportion of IHT on that amount, and the total IHT on the estate would be £190,000. The “free of tax” wording costs the estate an extra £26,667 in IHT — borne entirely by the residuary beneficiaries.

Worked example 2: multiple free-of-tax legacies

Where there are several free-of-tax legacies, each is grossed up individually and the total grossed-up value is used to establish the chargeable estate. HMRC’s IHT400 workings sheets include a grossing-up table to assist executors.

Consider an estate of £600,000 (after debts) with two free-of-tax legacies of £50,000 each and the residue to charity (which is exempt):

1. Gross up each legacy: £50,000 ÷ 0.6 = £83,333.
2. Total grossed-up legacies: £166,667.
3. Because the residue goes to charity (exempt), IHT only applies to the grossed-up legacies. Taxable above NRB = £166,667 − £325,000 = £0 (fully within nil-rate band in this example). No IHT payable.

Note that where the residue is partly or wholly exempt (e.g. passing to a spouse or charity), the grossing-up calculation becomes more complex — HMRC Appendix 2 to the IHT400 sets out a two-stage calculation. Specialist advice is essential in these cases.

Grossing up when the 36% reduced rate applies

Where the estate qualifies for the reduced 36% IHT rate (because at least 10% of the net estate is left to charity), the grossing-up fraction changes:

This slightly reduces the grossed-up amount and therefore the IHT on free-of-tax legacies.

How to avoid unintended grossing up

The simplest way to avoid grossing up is to leave all legacies “subject to inheritance tax” — the default position under English law. The legatee then bears the IHT attributable to their gift.

Alternatively, if you want a legatee to receive a guaranteed net amount, consider:

• Increasing the gross legacy to account for the tax, so that after tax the legatee receives your intended net amount — but instruct your solicitor to make the legacy “subject to tax”.
• Holding life insurance in trust for the legatee (written in trust, so outside the estate) to pay the net amount directly, keeping the will legacy subject to tax.
• Making a lifetime gift rather than a testamentary one, subject to the seven-year rule.

Grossing up and the residuary beneficiaries

Residuary beneficiaries bear the cost of grossing up directly — their share of the estate is reduced by both the net legacy and the additional IHT. They have no right of recovery against the free-of-tax legatee unless the will expressly provides one.

This makes it important for testators to understand the financial impact of “free of tax” wording before including it. At 40% IHT, a £60,000 net-of-tax legacy costs the residue £100,000 — the net legacy plus £40,000 in IHT.

Reporting grossed-up legacies to HMRC

Executors must report grossed-up legacies on form IHT400 (or IHT435 where RNRB applies). HMRC’s guidance in the IHT400 Notes (chapter 16) sets out the step-by-step worksheets for:

• Simple grossing up (all residue chargeable).
• Grossing up where residue is partly exempt.
• Grossing up where residue is wholly exempt.

Professional advice from a solicitor or chartered accountant specialising in probate is strongly recommended when any free-of-tax legacy exists.

Summary

• Grossing up arises when a will leaves a legacy “free of tax” and the estate bears the IHT on the legatee’s behalf.
• At the standard 40% rate, the gross equivalent of a net legacy is Net ÷ 0.6 (i.e. Net × 1.667).
• The additional IHT from grossing up is borne by the residuary beneficiaries.
• Complex cases — exempt residue, reduced 36% rate, multiple mixed legacies — require HMRC’s Appendix 2 worksheets or professional advice.
• The simplest way to avoid grossing up is to draft all legacies as “subject to inheritance tax”.