Allocation of Exemptions and Reliefs

Question 1

When does allocation matter?

Answer 1

Where IHT is payable, and some estate passes to exempt beneficiaries and some to chargeable beneficiaries

Question 2

If there is a specific gift to exempt beneficiary and residue to chargeable beneficiary, what is taxable and from what?

Answer 2

Only the residue, IHT paid from residue

Question 3

If specific gift to exempt beneficiary and residue to both chargeable and exempt beneficiary, what is taxable and from what?

Answer 3

Chargeable residue split is taxed

Question 4

If there is a specific gift to chargeable beneficiary (subject to tax) and residue to exempt, who is taxed?

Answer 4

Gift is taxed; tax paid from legacy. Exempt residue left untouched

Question 5

If there is a specific gift to chargeable beneficiary (subject to tax) and residue to both, who and how is taxed?

Answer 5

IHT paid proportionally from child’s legacy, and chargeable portion of residue

Question 6

If specific gift to chargeable beneficiary (free of tax) and residue to exempt, who pays the tax?

Answer 6

Legacy paid gross and IHT paid from residue

Question 7

What is grossing up and when is it needed?

Answer 7

Its working backwards on tax - so receiving £100,000 NET would actually mean £66,666.77 payable in tax (because 60% of 166,666.77 is 100,000)

You need to gross up if:

1) Will says free of tax
2) Recipient not exempt
3) Estate liable to pay tax