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What is the 7 Year Rule for Inheritance Tax in Scotland?

You may never have heard of the 7 year rule for inheritance tax, but it’s an important aspect of the law that everybody should be familiar with. Inheritance tax can be complex, but it’s something many of us will have to deal with at some point in our lives, so it’s always best to keep yourself well informed. 

There are certain exemptions and allowances written into inheritance tax law that can be used to reduce the amount owed. However, it’s crucial you learn how these work to ensure you are making the most of them. Let’s take a closer look at the 7 year rule for inheritance tax in Scotland. 

How Does Inheritance Tax Work in Scotland?

Inheritance works in the same way across the UK. Estates valued at less than £325,000 are not subject to inheritance tax, but estates valued at over this threshold are. Inheritance tax applies a flat rate of 40% to the value that exceeds the threshold amount. 

The estate of someone who passes away encompasses a number of different things, including property, possessions, finances, and investments. However, tax can also apply to gifts you have given away before your death, which is where the 7 year rule for inheritance tax comes in. 

Gifts 

Inheritance tax law allows for certain tax-free gifts to be given away before death. Gifts may include things like cash, property, possessions, or stocks.

Gifts can also include donations to organisations such as charities, sports clubs, community centres, or educational institutions. 

A rule called annual exemption states that up to £3,000 worth of tax-free gifts can be given away every year. An unlimited number of small gifts, up to a value of £250 per person, can be given away as well. Wedding gifts are another feature of inheritance tax. Tax-free wedding gifts can be given to children, up to value of £5,000, £2,500 can be given to grandchildren or great-grandchildren, and up to £1,000 for anyone else. 

The 7 Year Rule for Inheritance Tax

As long as the person in question dies 7 years or more after giving away the gifts, they will not be subject to inheritance tax. However, if they die within 7 years of giving the gifts, inheritance tax will be applied. 

Rather than simply applying the standard 40% tax rate, the length of time between death and the giving of the gift is used to calculate how much tax should be incurred. 

For example, if you give away a gift and then die between six and seven years later, the beneficiary will be required to pay a rate of 8% inheritance tax on the value of that gift. Dying between five and six years after giving the gift and 16% will be applied. Between four and five years will see 24%, and between three and four will result in 32% being applied. If you die within three years of giving a gift, the full rate of 40% will apply. 

This aspect of the 7 year rule for inheritance tax is known as taper relief. However, taper relief only comes into effect if the total value of the gifts exceeds the £325,000 threshold. 

Conclusion

Inheritance tax can be a complex subject to get your head around. Given that you are most likely dealing with it in the context of a family death, it can also be an emotionally draining process. However, it’s important you get things right, as the wrong decision can have serious financial consequences and cause strain between family members. Use this guide to learn all you need to know about the 7 year rule for inheritance tax in Scotland so that you know what to expect whether you are a benefactor or a beneficiary.