When a donor makes a chargeable lifetime transfer and pays the inheritance tax out of their own pocket, the tax is itself part of the loss to their estate, so the gift has to be grossed up. Above the nil rate band still available, every £80 that reaches the trust represents £100 of value transferred, and that larger grossed up figure is what goes into the donor’s seven year total and what is taxed again if they die within seven years.

Why does it make a difference who pays the lifetime tax?

Inheritance tax on a lifetime transfer is charged on the loss to the donor’s estate, not on what the recipient receives. Section 5(3) of the Inheritance Tax Act 1984 (IHTA 1984) says a person’s liabilities are taken into account in valuing their estate, and section 5(4) adds that, immediately after a transfer, those liabilities include the transferor’s liability for inheritance tax on the value transferred. HMRC explains the result at IHTM14547: the estate is reduced not only by the gift but also by the tax on it, so the value transferred has to be grossed up to find the tax.

If the tax is paid by someone else, normally the trustees of the trust receiving the gift, there is nothing to gross up. Section 162(3)(b) treats tax recovered from anyone other than the transferor as a liability the transferor had a right to have reimbursed, and section 162(1) ignores such a liability in valuing the estate. HMRC’s manual at IHTM14012 states the two outcomes plainly: if the transferor pays, the net gift is grossed up; if the transferee pays, the value transferred does not include the tax.

The rule mainly affects gifts that are taxed when made, such as gifts into a discretionary trust, which are explained in chargeable lifetime transfers. HMRC confirms at IHTM14593 that grossing does not normally apply to a failed potentially exempt transfer, because the recipient is liable for that tax, unless the transferor was obliged to pay it.

When will HMRC treat the donor as paying?

IHTM14541 lists the situations in which HMRC grosses up the value transferred:

  • the account or correspondence says the transferor is to bear the tax;
  • at the time of the gift the transferor enters into a binding agreement to pay the tax;
  • after the gift the transferor pays tax, even a single instalment, direct to HMRC; or
  • the tax is paid from the transferor’s death estate.

Outside those cases, IHTM14542 says a later payment of tax by the donor can be treated either as a separate potentially exempt transfer or as a separate chargeable transfer, with the annual exemption and the normal expenditure out of income exemption considered in the usual way. A loan from the donor to the trustees so that they can pay the tax is not a reason to gross up.

How is the grossing calculation done?

Lifetime chargeable transfers are taxed at one half of the death rate under section 7(2), which HMRC at IHTM14544 notes is usually 20%. If tax at 20% comes out of a gross figure, 80% is left, so the part of the net gift above the available nil rate band is multiplied by 100/80. HMRC describes this as substituting the fraction four fifths for the three fifths used when grossing at the 40% death rate. The steps are:

  1. Take the gift after any exemptions, such as the annual exemption.
  2. Find the nil rate band still available: the band at the date of the gift less chargeable transfers made in the previous seven years.
  3. Multiply the part of the gift above that available band by 100/80.
  4. Add back the available band. The result is the grossed up value transferred, and the tax is 20% of the amount above the band.

HMRC’s own example at IHTM14012 uses a transfer of £425,000 to a discretionary trust with a full £325,000 nil rate band available:

Step Donor pays Trustees pay
Net gift £425,000 £425,000
Above the band £100,000 grossed to £125,000 £100,000
Value transferred £450,000 £425,000
Lifetime tax at 20% £25,000 £20,000

The check is simple: £450,000 less £25,000 of tax leaves exactly the £425,000 the trust received. A quicker way to reach the same tax figure is one quarter of the net excess, because 20/80 is one quarter.

What if the donor has already used part of the nil rate band?

Only chargeable transfers in the previous seven years reduce the band for this purpose. Potentially exempt transfers are left out while the donor is alive, as HMRC’s example at IHTM14577 shows when it omits an earlier gift to a son from the lifetime calculation.

Illustration only. A donor gave £200,000 to a discretionary trust three years ago. They now give a further £185,000 to a second trust, after exemptions, and agree to pay the tax. The nil rate band is £325,000, so £125,000 is still available.

  • Net excess: £185,000 less £125,000 is £60,000.
  • Grossed up excess: £60,000 × 100/80 is £75,000.
  • Value transferred: £75,000 plus £125,000 is £200,000, and the tax is 20% of £75,000, which is £15,000.

The donor’s seven year total is now £400,000, not £385,000. That higher total is carried forward against later gifts and, if the donor dies within seven years, against the estate.

What if the donor and the trustees share the tax?

IHTM14543 deals with partial grossing. Deduct the tax the trustees have agreed to pay from the chargeable transfer, gross up the net figure, and the result is the gross chargeable transfer. In HMRC’s example, a gift of £400,000 after exemptions, where the trustees agreed to pay £10,000 of the tax, grosses up to £406,250. Tax on that figure is £16,250, of which the trustees pay £10,000 and the transferor £6,250.

Who pays also affects payment by instalments. Section 227(1)(b) allows the ten yearly instalment option on qualifying property only where the tax is borne by the person benefiting from the transfer, and IHTM14543 confirms instalments are available only on the part of the value that is not grossed up. Our page on paying by instalments explains which assets qualify.

What happens to a grossed up gift if the donor dies within seven years?

Section 7(4) removes the half rate for chargeable transfers made within seven years before death, with taper relief for transfers more than three years before death. IHTM14572 says the value used for the additional charge includes the grossing addition made at the time of the gift, because that tax was in effect a further gift by the donor. There is no further grossing for the extra tax: IHTM14012 confirms the transferor is not liable for further tax payable on their death, and IHTM14592 says the transferee is.

IHTM14576 sets the additional tax as the recalculated tax less the lifetime tax already paid or payable. If the recalculated figure is lower, nothing more is due and nothing is repaid. Section 226(3B) makes any extra tax on a gift into trust due six months after the end of the month of death.

Illustration only. Using HMRC’s £425,000 gift, suppose the donor dies two years later and the nil rate band is still £325,000:

  • Donor paid: 40% of £125,000 (the grossed up excess) is £50,000, less the £25,000 already paid, leaving £25,000 for the trustees.
  • Trustees paid: 40% of £100,000 is £40,000, less £20,000 already paid, leaving £20,000 for the trustees.

A separate rule applies where no tax was paid during the donor’s lifetime and the personal representatives pay it after death. IHTM14545 says the transfer is grossed up, the instalment option is not available, and the lifetime tax is a liability deductible against the death estate.

When is the lifetime tax due?

Under section 226(1), lifetime tax is due six months after the end of the month of the transfer, except that for a transfer made between 6 April and 30 September it is due at the end of April in the following year. The donor’s account of the transfer is due within 12 months from the end of the month in which it is made, or three months from first becoming liable if later (section 216(6)(c)). A grossed up gift is reported at its grossed up value, so the account should show the calculation.

What mistakes come up most often?

  • Grossing up a failed potentially exempt transfer where the recipient pays. The tax on that gift is the recipient’s liability, as explained in who pays IHT on gifts when the donor dies.
  • Using the death fraction of three fifths instead of four fifths for a lifetime gift.
  • Recording the net gift rather than the grossed up value in the donor’s seven year total, which understates the tax on later gifts and on the estate.
  • Grossing up the additional tax on death. IHTM14572 rules this out.
  • A donor paying “just the first instalment” for the trustees without realising IHTM14541 treats that as bearing the tax, which switches on grossing and removes the instalment option.
  • Confusing lifetime grossing with grossing a tax free legacy in a partly exempt estate, which follows different rules; see tax free legacies and the residue.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.