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Inheritance Tax in Scotland

I Bequeath my Estate to… HMRC?

Inheritance Tax in Scotland (IHT) is a tax on a person’s estate. An estate is made up of all the assets a person held when they died.

New figures from HMRC show that many estates must now navigate the complex inheritance tax framework. This is because the tax-free threshold – the amount of assets upon which inheritance tax is not levied – has remained stagnant at £325,000 since 2009. However, at the same time, assets have risen in value due to inflation. For example, the average house price in Scottish cities in 2020-21 has risen to £207,142. When we compare this to the average Glasgow house price in 2009, which was £138,708, we can see there has been 40% rise. This is all while the tax-free threshold for IHT has remained the same. This means that even more ‘straightforward’ estates, where the main asset is a home, may be liable for IHT.

Therefore, it is more important than ever to consider the complexities of IHT before it becomes time to deal with your estate. Smart planning can be used to minimise the amount of assets exposed to IHT in several ways.

Minimising Assets Exposed to IHT

Inheritance Tax in Scotland

Wills & Codicil

Drafting a Will or Codicil can be one way to plan for IHT. This can be done by maximising the use of exemptions to IHT. Situations where a legacy is left to a spouse, civil partner, or a charity. For some people, the use of a Trust may be an effective way to hold onto the management of an asset. This gives the benefit to someone else when the time comes. However, trusts have recently come under new HMRC reporting obligations, which means that their use has to be carefully considered.

Gifting & Estate Planning

Multitudinous misconceptions exist regarding the use of gifting in estate planning. In reality, gifting assets often carries significant risk and can be ineffective at minimising IHT liability. Firstly, a general ‘seven year rule’ applies. This means that gifts made in the seven years preceding death can be incorporated for the purposes of calculating inheritance tax in Scotland.

Further, gifts which retain some benefit to the gifter, such as continuing to get the benefit of a property, can also be included in the IHT calculation. When an asset, such as a home, is gifted, it also opens up risks. Such as if the recipient of the gift becomes insolvent, if they divorce their spouse, or if they dissolve their civil partnership. If a house is gifted, it may also negate the Residence Nil-Rate Band. Some gifts, however, can be effective – such as gifts connected with specific occasions – but advice should be sought when a large gift is being considered.

Once the time comes, and a person’s estate must be distributed, IHT often again requires attention. A professional can help to utilise previously un-used nil-rate thresholds from a pre-deceasing spouse and apply them to the estate of the other spouse on the second death. Further, estate administration may require a tax return to be completed. There may be penalties where this is late or incorrect without excuse.

Inheritance Tax in Scotland

In summary, IHT is an unpopular tax that is becoming more prevalent as asset prices rise. Read, in 2020-2021, estates in the UK paid out a huge £5.76 billion in IHT. Estate planning can, however, help to allow your beneficiaries to retain more of their legacy. If you are currently administering an estate, then attention ought to be paid to IHT. It is advisable to seek advice in relation to creating a tax return and utilising nil-rate allowances.

Our Glasgow-based team of experts at Oracle Law can assist you with estate planning and providing bespoke advice around inheritance tax liability. Use the contact us form or call our office to speak with an advisor.

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