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As well as the example below further examples may be found in the instructions on interaction (IHTM26101) and grossing up (IHTM26121). For an example including both interaction and grossing refer to IHTM26158.

Example

Tanya died in August 2002 leaving an estate of 拢500,000. By Will Tanya left a legacy of 拢300,000 free of tax to Xavier, a chargeable beneficiary, and the rest of the estate to a qualifying charity. There is no business relief (BR) (IHTM25131) or agricultural relief (AR) (IHTM24001).

Tanya was also life tenant of settled property (IHTM16000) valued at 拢2M. The trust property includes agricultural property qualifying for AR. The trust passes to a chargeable beneficiary.

The effect of S40 on the calculation of Xavier鈥檚 拢300,000 legacy is:

• There is no interaction because there is no BR or AR in the free estate and the AR on the settled property is irrelevant.
• The 拢300,000 is grossed up at its own rate and, for grossing purposes, the settled property is ignored.

The grossing calculation is:

Legacy = 拢300,000

Less nil-rate band -拢250,000

Excess = 拢50,000

Excess of 拢50,000 脳 (100 梅 60) = 拢83,333

Add back nil-rate band +拢250,000

Grossed-up value of legacy = 拢333,333

The grossed up value of the 拢300,000 legacy, and consequently the chargeable estate on Tanya鈥檚 death, is 拢333,333 plus the value of the settled fund after AR. Tax is assessed accordingly.