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A Guide to Inheritance Tax Allowance in Scotland 2023

The particular laws surrounding inheritance tax can leave many of us feeling confused. However, we must learn how it all works so that we can best manage the estate and possessions of a loved one if they were to pass away. 

Inheritance tax allowance in Scotland allows for tax-free gifts to be given. Let’s take a closer look at inheritance tax laws before we go on to discuss and guide you through inheritance tax allowance in Scotland. Read on to find out more. 

What is Inheritance Tax?

So, what is inheritance tax? What does it have to do with inheritance tax allowance in Scotland? Inheritance tax is the name given to the tax that has to be paid on the estate of someone who has died. The estate encompasses things like money, owned property, possessions, and investments like stocks and shares. 

If the value of the estate is worth less than £350,000 or if it has been left to a spouse or civil partner, no inheritance tax will have to be paid. However, if the value of the estate is over £350,000 and it has been left to your children or another beneficiary, then a tax rate of 40% will be applied. 

If you have given away gifts with a total value of £350,000 or more within seven years of your death, these could also be subject to inheritance tax. This is where allowances come in, so read on to learn about inheritance tax allowance in Scotland. 

Annual Exemption

Inheritance tax allowance in Scotland allows people to give away tax-free gifts before their death. 

Gifts include things like money, property, stocks and shares, and goods like jewellery or antique furniture. Gifts given to spouses or civil partners are not subject to inheritance tax, but gifts to other people are if they exceed a certain value. 

Annual exemption is the name given to the law that allows for gifts of up to £3,000 to be given without incurring inheritance tax each tax year. Any unused annual exemption can be carried forward into the next year. 

For example, you could give a gift of £2,000 in one tax year and then a gift of £4,000 the following year, with no inheritance tax incurred on either gift. This is a pillar of inheritance tax allowance in Scotland that is used by people every year. 

Small Gifts 

Another of the most commonly used features of inheritance tax allowance in Scotland is the rule surrounding small gifts. 

This law states that you can give away gifts of up to £250 to as many people as you like without incurring tax. This rule also encompasses gifts given for birthdays and Christmas, which will not be liable for tax.

Wedding Gifts

There is also inheritance tax allowance in Scotland for gifts given to celebrate weddings and civil partnerships. Tax-free gifts can be given in these circumstances, depending on who you are giving the gift to and the value of it. 

If you are giving your child a wedding gift, the threshold before tax is £5,000. For a grandchild or great-grandchild, it is £2,500, while for anyone else is it £1,000.  

Income Gifts & Family Maintenance

If you give regular monetary gifts from your monthly income, these will not normally be subjected to tax according to inheritance tax allowance in Scotland. 

For example, you will not be expected to pay inheritance tax if you regularly pay into a savings account for your child or financially support an elderly family member. 

How Much Tax Do You Pay for Gifts?

No tax is due on gifts you have given more than seven years before your death. However, if you die within seven years of giving a gift, there will be tax to pay. According to inheritance tax allowance in Scotland, the gap between the giving of the gift and your death will determine the tax owed. 

If you died between six and seven years after giving the gift, you will be charged a tax rate of 8%. Between five and six years and you’ll see a 16% inheritance tax applied, between four and five years will incur 24%, while between three and four will see tax of 32%. If you die within three years of giving a gift, it will see the full tax rate of 40% applied. 

This feature of inheritance tax allowance in Scotland is known as taper relief. However, it will only apply if the total value of gifts you have given in the seven years before your death exceeds £350,000. 

Conclusion 

Nobody wants to pay inheritance tax. In fact, a recent YouGov study revealed that around 30% of people think the law is unfair. However, inheritance tax is here to stay, so it’s best you learn all you can about it. Use this guide to help you understand inheritance tax allowance in Scotland and make the right decisions for your estate.