Dealing with the death of a loved one is never easy. Emotions will be running high, and the last thing you want is for financial matters to complicate things even further. The laws surrounding inheritance tax thresholds and rates can be confusing, but you must understand them to prevent any complications from arising in the future.
To help you better understand how inheritance tax works in Scotland, we’ve written up a guide with everything you need to know about thresholds and rates and how they can affect you and your loved ones.
What is Inheritance Tax?
When somebody passes away, there may be tax incurred on the value of their estate. This is called inheritance tax, and it can encompass money, property, possessions, and even investments. The law stipulates that any due inheritance tax must be paid within six months of the death. After this period interest may be charged.
You might think that inheritance tax isn’t something that you need to worry about. However, government statistics reveal that inheritance tax payments are on the rise, increasing by 4% in 2019 – 2020 when compared to the previous year. Experts predict that the government will receive approximately £7.2 billion from inheritance tax between 2023 and 2024.
This means that understanding how the process works is vital. Read on to learn more about inheritance tax thresholds and rates in Scotland.
Inheritance Tax Thresholds
Some people assume that everyone is required to pay inheritance tax. However, this is a common misconception. There are inheritance tax thresholds in place which mean that only certain people will have to pay tax on their estate after they pass away.
If somebody was to pass away and leave an estate valued at below £325,000, there would be no tax applied. If an estate valued at more than £325,000 is left to a spouse, civil partner, charity, or amateur sports club, it would also be exempt from inheritance tax.
If the estate of someone who has passed away is valued at more than £325,000, inheritance tax will apply. However, inheritance tax thresholds can rise to £500,000 if passing on a home valued at under £2 million to children or grandchildren.
The government confirmed last year that inheritance tax thresholds will be frozen until at least 2028, so don’t expect them to change anytime soon.
Inheritance Tax Rates
Now that we understand how inheritance tax thresholds work, let’s take a look at the rates and discuss what people are expected to pay.
Inheritance tax is charged at a standard rate of 40%. However, this 40% rate is only charged on the portion of the estate that exceeds the threshold. For example, if an estate was valued at £330,000, the 40% tax rate would only be applied to the £5,000 that took the value over the established total for inheritance tax thresholds.
Much like inheritance tax thresholds, you shouldn’t expect changes to these rates to come about anytime soon. However, there are methods that can be used to reduce the amount of inheritance tax you have to pay.
How to Reduce Inheritance Tax
There are certain ways to reduce the amount of inheritance tax owed, and there are even ways to shelter from inheritance tax using a will.
Donating part of your estate to a charity can be an effective way of reducing the amount of inheritance tax you have to pay. By leaving at least 10% of your estate to charity, you could see a rate reduction of 4%.
Another way of circumventing inheritance tax is by giving away gifts. A law called annual exemption allows people to give away gifts before their death that are not subject to tax. Gifts that total a value of up to £3,000 can be given away tax-free under this law, and unused annual exemption can be carried forward by a maximum of one year.
The law also allows for the tax-free giving of small gifts of up to £250, as well as wedding gifts of £5,000 for children and £2,500 for grandchildren.
However, if you give gifts that total a value of over £350,000 and die within seven years, there will be inheritance tax to pay. This is calculated using a system known as taper relief, which means that dying within six or seven years of giving a gift will see a rate of 8% applied, five and six years 16%, four and five years 24%, and three and four years 32%. Dying within three years of giving a gift means the full inheritance tax threshold of 40% will be applied.
Dealing with the death of a loved one is hard enough. Having to navigate the complexities of inheritance tax thresholds, rates, and laws can make things even more difficult. However, understanding how inheritance tax works is absolutely vital, it’s something many of us will have to deal with at some point in our lives.