In the context of a loan agreement, grossing up may arise where A is supposed to be paying 100% of interest to B but has to withhold tax at, say, 10%. Therefore, A will pay 90% to B and 10% to HM Revenue & Customs (HMRC). In such a case, the loan agreement will often require A to pay to B such further sum as will ensure that B actually receives and retains 100%. At first glance, that sum may seem to be 10%. However, that 10% itself may be subject to withholding tax, in which case A should pay 9% to B and 1% to HMRC. A would then still be obliged to pay 1% to compensate B but again withholding might apply and it might pay 0.9% to B and 0.1% to HMRC. This process is called grossing up. A gross-up clause is one that makes it clear that A has to pay such further sum as, after deducting any tax, leaves B with 100%. If the withholding tax rate is 10%, the grossing up formula is:

In the context of inheritance tax, grossing up arises where a will contains a chargeable legacy to be paid free of tax and all or part of the residuary estate is exempt. The legacy needs to be grossed up to calculate the total value transferred (that is, the legacy and the tax on the legacy). While inheritance tax rates remain at 40%, simply multiply the legacy by 5/3. A legacy of £100,000 is grossed up to £166,666 (£100,000 x 5/3), meaning that tax of £66,666 is due on the total value transferred.