Inheritance tax is a levy on the value of a deceased person’s estate. The tax applies to those benefiting from an inheritance, with the exception of the deceased person’s spouse, civil partner and children. Inheritance taxes should be paid on money, property and all assets, but careful planning by the estate holder can avoid or at least reduce the tax payable. Scottish inheritance tax is paid to Her Majesty’s Revenue & Customs (HMRC) and is governed by British law.
Seek independent advice from an accountant. Specialist accountants will advise you on the best trusts to put your assets into in order to avoid inheritance tax. In Scotland, parts of the law are different from the rest of the UK. Scottish law prescribes that the surviving spouse only inherits property up to £300,000 ($460,000) in value, furniture up to £24,000 ($36,000) in value and savings up to a value of £42,000 ($55,000). Legal action is needed to inherit any remaining assets.
Arrange your affairs so that your assets are given as gifts, rather than inherited. You can legally avoid having inheritance tax levied on your estate this way. This is done by transferring ownership of your assets to the intended beneficiaries prior to your death. For example, signing over ownership of your house to your children means that upon your death, they avoid the inheritance tax liability. However, it is easier under Scottish law to challenge a will or to dispute the confirmation of executors. A legal challenge could lead to inheritance tax becoming payable on assets that do not go to their intended recipient according to the will, so do everything you can to include all entitled parties in some way so that the chances of a challenge diminish.
Give cash gifts. If you intend to pass money on to your family, take advantage of tax exemptions now. You can give tax-free cash gifts each tax year. You are entitled to give a gift of £3,000 ($4,599) to your spouse, civil partner and child once every tax year, and you can give £1,000 ($1,519) to each grandchild. You can give a gift of £5,000 ($7,598) to your child when he marries.
Ensure that you have written a will. Not writing a will means that the tax authorities will administer your estate. In Scotland, the intended executor must apply for a grant of confirmation; this is different from the rest of the UK and America. Writing a will does not avoid inheritance tax on its own, but it does ensure that your assets are transferred to the intended recipients. However, it is essential for an estate owner to provide money to cover legal costs after death to deal with any challenges. Normally a will is final and definitive. Scottish succession law is unusual because wills are not considered definitive. A child or spouse, even if written out of the will, has certain legal rights to the estate and can issue a challenge to exercise those rights.
Open a discretionary trust. By placing your assets and money in a trust, up to £650,000 ($988,800) can be transferred to the beneficiary without inheritance tax liability. You select the trustees, such as children or your spouse, and they become the legal owners of the assets.
Charitable donations are exempt from inheritance tax, so consider giving to a charity in your will.
Make sure all of your affairs are conducted within Scottish law, not UK law. Scottish law has many differences from UK law. Be aware that other taxes, such as capital gains tax, may be payable in cases where inheritance tax has been avoided.
Tips and warnings
- Charitable donations are exempt from inheritance tax, so consider giving to a charity in your will.
- Make sure all of your affairs are conducted within Scottish law, not UK law. Scottish law has many differences from UK law.
- Be aware that other taxes, such as capital gains tax, may be payable in cases where inheritance tax has been avoided.