Inheritance tax: the laws in Scotland
As trusted personal lawyers, many Gibson Kerr clients come to them with concerns about the taxes to be paid on a deceased’s estate, as it is essential that these are calculated and taken into account before the bequests of the beneficiaries are paid.
The main tax to be aware of is inheritance tax, which is a percentage of the entire estate that must be paid. Some of the laws surrounding the payment of Inheritance Tax (IHT) can be complex and technical, and a lawyer is able to offer clear and practical advice on calculating and paying the IHT.
The good news is that the IHT is not payable on all domains. As a general rule, it is only due if the total value of the deceased’s assets is more than £325,000. This means that the first £325,000 is free of inheritance tax, but any assets above this value will be subject to IHT at 40%. However, there are some key exceptions to this rule that you should be aware of and we will describe the main ones here:
– Assets transferred to the surviving spouse or PACS partner of the deceased are exempt from inheritance tax, regardless of their total value;
– If the deceased had a spouse or civil partner who died before them, their unused inheritance tax relief may be available, meaning the threshold increases to a maximum of £650,000;
– All assets transferred to a registered charity are exempt from inheritance tax, again regardless of their value;
– If the property of the deceased is bequeathed to a direct descendant, an additional residency bracket applies. It’s currently £175,000, or £350,000 for a couple.
It is not just the assets of a loved one that they owned at death that may be subject to IHT. It should be borne in mind that it may also be due on donations made by the deceased in the seven years preceding his death. The value of these gifts should be added to the value of the estate to see if this pushes it above the threshold. Exemptions to this include small gifts (such as birthday gifts) which may be treated as “exempt gifts”, as well as gifts given to a spouse or civil partner.
Additionally, if someone has transferred goods or items for less than their actual market value (e.g. selling property to a family member for less than its value), the difference in value is treated as a gift for the purposes of the IHT. However, the amount of tax payable on a life gift depends on the time elapsed before the death of the gift and decreases over time.
Potential penalties if you delay payment
Executors should be aware that inheritance tax must be paid within six months of death, otherwise interest will be charged, increasing the amount owed. This means they will need to start working quickly – especially at a time when many companies are working remotely, everything can take longer to process than usual.
The estate may also be subject to income tax on any income earned during the administration period and capital gains tax on assets sold by executors. The executor will also need to ensure that all taxes the deceased person was liable for prior to death have been paid.
With complex legal processes and critical timing, executors often feel stressed and overwhelmed. However, by making timely contact with an experienced enforcement lawyer, they can relieve themselves of much of the pressure and get the help and advice they need.
Lindsay Maclean, a personal law partner at Gibson Kerr, is a trusted expert in this area. She was appointed Regional Director of the Scottish Branch of Lawyers for the Elderly and has helped many people through this difficult process. Lindsay and her team are happy to assist you with the estate administration process, including calculating and paying taxes due. They work remotely and can set up a phone or video meeting with you (via Skype, Zoom or similar).