Inheriting money or assets from a deceased person is usually a complex process that involves navigating tax laws and regulations. In Scotland, as with the rest of the UK, inheritance tax rules determine how much of an inheritance exceeding a certain threshold will be subject to tax.
What is the inheritance tax threshold in Scotland?
In the tax year 2022-23, the inheritance tax threshold in Scotland is £325,000. This means that if the total value of what you inherit from a deceased person is below this amount, you will not have to pay any inheritance tax on it. Anything above £325,000 is taxed at 40%.
This tax-free threshold has been frozen at £325,000 since 2009. It applies to the total value of the estate before any debts or expenses are deducted.
What counts towards the inheritance tax threshold amount?
When calculating the value of an inheritance for tax purposes, all assets left by the deceased are included. This can comprise of:
- Property
- Savings and investments
- Cars and other vehicles
- Jewellery, art, antiques
- Proceeds from life insurance policies not written in an appropriate trust
Pensions and some types of trusts may be excluded from inheritance tax calculations. The deceased person’s home can also be passed on tax-free if it is left to a direct descendant.
What inheritance tax reliefs and exemptions exist?
There are certain inheritance tax reliefs and exemptions that can reduce the taxable amount of an inheritance:
- Spouse or civil partner exemption – Assets left to a spouse or civil partner are exempt from inheritance tax if the recipient lives in the UK permanently. This applies to marriages and civil partnerships recognized under UK law.
- Charity exemption – Any gifts left to qualifying charities are exempt from inheritance tax.
- Annual exemption – Gifts made more than 7 years before the gifter’s death are generally exempt up to a value of £3,000 per tax year. Any unused annual exemption can be carried over to the following year.
- Small gifts exemption – Gifts up to £250 per donee per tax year are exempt.
- Normal expenditure exemption – Gifts that are made from the deceased’s income and are part of their normal expenditure are exempt up to certain limits based on available income.
- Agricultural property relief – Working farms and agricultural land can get up to 100% relief from inheritance tax if certain conditions are met.
- Business property relief – Businesses and shares in certain types of companies can get 50% or 100% inheritance tax relief.
When is inheritance tax due?
Inheritance tax must generally be paid within 6 months from the end of the month in which the deceased passed away. For example, if the person died in March 2023, the tax payment deadline would be 30 September 2023.
In some cases, it is possible to pay inheritance tax in annual instalments over 10 years if certain conditions are met related to the assets inherited.
How is inheritance tax calculated in Scotland?
Here is an example illustrating how inheritance tax would be calculated for an estate in Scotland:
| Asset | Value |
|---|---|
| Family home | £500,000 |
| Savings account | £100,000 |
| Life insurance payout | £150,000 |
| Total estate value | £750,000 |
In this example, the total estate value is above the £325,000 inheritance tax threshold. £750,000 – £325,000 = £425,000. This £425,000 portion of the estate is taxable.
Inheritance tax is charged at 40% on the amount above the threshold. So 40% of £425,000 is £170,000.
Therefore, the total inheritance tax bill on this estate would be £170,000.
How is inheritance tax different for residential property?
There is an additional inheritance tax residence nil-rate band that applies when passing on a main residence to direct descendants. This was introduced in 2017 to lessen the inheritance tax burden in relation to escalating property prices.
In tax year 2022-23, this residence nil-rate band is £175,000. When added to the standard nil-rate band of £325,000, it takes the effective inheritance tax threshold for residential property gifted to children or grandchildren up to £500,000.
Any unused portion of the residence nil-rate band can be transferred between spouses and civil partners.
Are there differences between inheriting cash versus property?
There are some differences to be aware of when inheriting cash compared to property:
- Cash can be accessed immediately while property may take longer to sell if needed.
- A property inheritance provides a tangible asset while cash can be volatile.
- Owning and maintaining property has costs unlike holding cash.
- Empty homes may incur extra taxes whereas cash does not.
- Property gains value over time typically, but inflation erodes cash savings.
However, there is no difference in how inheritance tax applies. Cash and property are both included when valuing an estate. The tax treatment is the same based on the total estate value exceeding the nil-rate band.
What happens if you inherit over the tax-free threshold?
If you inherit assets worth more than the inheritance tax threshold of £325,000, anything over this amount is subject to 40% inheritance tax. However, there are steps you can take to minimize the tax due:
- Claim any available tax reliefs – agricultural relief, business property relief etc can reduce taxable value
- Offset tax using the unused nil-rate band from a deceased spouse if applicable
- Make charitable donations from the estate to bring the value under the threshold
- Invest in companies qualifying for inheritance tax reliefs
- Set up a trust to manage the inheritance and limit tax exposure
Even if the inheritance is above the tax-free limits, in many cases it is possible to reduce the inheritance tax liability or avoid it completely with proper planning.
Does inheritance tax apply at the same rates across the UK?
Inheritance tax rates and thresholds are the same across England, Wales, Scotland, and Northern Ireland. The standard nil-rate band is universal at £325,000, with the residence nil-rate band of £175,000 also applying UK-wide.
However, inheritance tax rules can vary between different countries. For example, Ireland has a higher inheritance tax threshold of €335,000. Jersey and Guernsey have no inheritance tax. So the specific rates depend on the country.
How do Scottish inheritance tax rules compare to the rest of the UK?
The main inheritance tax rules around thresholds, rates, exemptions, and reliefs are identical in Scotland compared to England, Wales, and Northern Ireland. There are no differences or special provisions.
The only key difference is that inheritance disputes in Scotland are settled in the Sheriff Courts, while England and Wales use the High Court for inheritance claims. But the underlying inheritance tax treatment does not differ.
Conclusion
Inheritance tax in Scotland kicks in for estate values exceeding £325,000. For property passed on to children or grandchildren, an effective £500,000 threshold applies before tax is due. Various exemptions and reliefs can also reduce inheritance tax liability.
While the inheritance tax rules are harmonized across the UK, it remains a complex system to navigate. Seeking professional financial and legal advice is prudent to minimize taxes and ensure wills are structured optimally.