IHT Grossing Up: When the Free Estate Bears the Tax on Specific Legacies
When a will leaves a specific legacy 'free of tax' and the IHT is paid from the residue, a circular calculation arises: the tax is part of the taxable estate. Grossing up resolves this circularity — but the result is often a significantly larger tax bill and a much smaller residue than the testator intended.
Worked Example: Simple Gross-Up
Estate: £500,000 total
NRB: £325,000 (no prior CLTs)
Specific legacy: £100,000 to a friend, expressed 'free of tax'
Residue: to surviving spouse (exempt)
Without gross-up (incorrect): IHT on £100,000 legacy = £0 (within NRB). Residue = £400,000 to spouse.
With gross-up (correct): The entire £500,000 is the taxable estate. NRB £325,000 is applied first. Remaining £175,000 is chargeable. At 40%: IHT = £70,000. The £100,000 free-of-tax legacy is delivered from the estate; the £70,000 IHT is paid from the residue. Spouse receives £500,000 − £100,000 (legacy) − £70,000 (IHT) = £330,000.
Note: because part of the NRB shelters the legacy, full grossing-up at the 40% rate does not apply here — the effective rate is lower. Complex cases require HMRC's grossing-up schedule or specialist calculation.
Frequently Asked Questions
What is grossing up in the context of IHT?
Grossing up is a mathematical adjustment applied when a will leaves a specific legacy 'free of tax' and the IHT on that legacy is to be paid out of the residuary estate. Because the tax on the legacy is itself part of the taxable estate (it reduces what is available for the residue), there is a circularity: the tax depends on the size of the taxable estate, but the size of the taxable estate depends on the amount of the tax. Grossing up resolves this circularity. The formula converts the net (after-tax) legacy amount into its gross (pre-tax) equivalent: Gross legacy = Net legacy ÷ (1 − effective IHT rate). At the standard 40% rate, the gross-up factor is 1 ÷ 0.6 = 1.667. So a £60,000 'free of tax' legacy grosses up to £100,000 — meaning the estate must find £100,000 of taxable value to deliver a £60,000 net legacy after paying the £40,000 tax from the residue.
When does grossing up apply?
Grossing up applies when all three conditions are met: (1) the will contains a specific legacy or gift that is expressed (or implied to be) 'free of inheritance tax'; (2) the IHT on that legacy is to be borne by the residue of the estate, not by the legatee; (3) the legacy is chargeable to IHT — i.e. not exempt (e.g. not passing to a surviving spouse or charity). The most common scenario: a testator leaves £50,000 to a friend (non-exempt) and the residue to a spouse (exempt). If the will says the friend's legacy is free of tax (or the will is silent and local law defaults to this), the residue must pay the IHT. Because the residue is the spouse (exempt), the tax comes from the taxable part of the estate — creating the gross-up.
How does grossing up interact with the nil-rate band?
Where part of the estate falls within the nil-rate band (NRB), the grossing-up calculation is more complex. The NRB is applied first against non-exempt specific legacies; only the excess above the NRB is subject to grossing up at the full 40% rate. For example: estate of £600,000, NRB £325,000, specific free-of-tax legacy to a non-exempt beneficiary, residue to exempt beneficiary. The NRB covers the first £325,000 of the non-exempt part at 0%. The excess (£600,000 − £325,000 = £275,000) is grossed up at 40%. The grossing-up formula at 40% on the excess gives an effective rate that is lower than 40% across the whole estate. HMRC's IHT400 notes include worked examples of grossing up with partial NRB coverage.
What is the practical effect of grossing up on the residue?
Grossing up typically reduces the residue significantly — often far more than the testator anticipated. Consider: estate £800,000, NRB £325,000, specific free-of-tax legacy of £200,000 to a non-exempt beneficiary, residue to spouse (exempt). Without grossing up (ignoring the circularity), the IHT on the £200,000 legacy above the NRB could appear to be around £50,000 (£125,000 above NRB × 40%). But with grossing up, the £200,000 legacy is notionally 'grossed up' to a higher value to account for the tax being paid from the residue — the gross-up increases the effective taxable amount. The spouse ends up with less than the simple arithmetic suggests. In complex estates, the grossing-up reduction to the residue can be very substantial and is often overlooked in will drafting.
How can will drafting avoid or manage the grossing-up problem?
The cleanest solution is to draft all specific legacies to non-exempt beneficiaries as 'subject to inheritance tax' (not free of tax) — meaning the legatee bears their own IHT. This eliminates the gross-up entirely and the residue does not pay the legatee's tax. Alternatively, a specific legacy can be expressed as a fixed net-of-tax amount with an explicit direction that the tax is paid by the legatee out of the legacy — but this requires the legacy to be large enough to absorb the tax and still deliver the intended net benefit. Where the residue is entirely exempt (e.g. passing to a surviving spouse), the grossing-up effect is most acute — every pound of IHT paid from the exempt residue is a pound taken from the exempt beneficiary. A specialist will drafter can model the grossing-up impact and ensure the testator's intentions are properly reflected.
Does grossing up apply to specific bequests of property as well as cash?
Yes — grossing up applies to any specific legacy that is expressed or treated as free of tax, including specific bequests of property, shares, or other assets. Where the specific legacy is a property (e.g. 'I give my cottage at [address] to my niece free of tax'), the IHT on the cottage must be grossed up and charged to the residue. This is particularly significant where the property is illiquid — the residue must find cash to pay the IHT on the property bequest. The IHT on specifically bequeathed real property is typically due within 6 months of the end of the month of death; if the residue is insufficient, the estate may need to borrow or sell assets to fund the tax.
Does Your Will Say 'Free of Tax'?
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