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Inheritance Tax Planning in Scotland

It was recently reported (here) that the people of Switzerland have rejected the introduction of a federal inheritance tax. Depending on where people live in Switzerland, they may or may not be liable to pay Inheritance tax on property they receive from their families. However, 71% of voters decided to vote against the introduction of a comprehensive Inheritance tax, which would have imposed a 20% tax on inherited property. Many believed that the introduction of the tax would put an unnecessary financial burden on individuals. 

Unlike in Switzerland, almost everyone in the UK will be liable to pay Inheritance tax – at least until inheritance tax reforms announced in the Government’s Summer Budget are implemented. Inheritance tax applies to all of the property that you have on your death – this is otherwise known as your ‘estate’ - which your surviving family members must pay. 

In most cases, people would rather avoid having to place additional financial burdens on their family members, such as inheritance tax payments for property that they passed on to them. While it is difficult to avoid Inheritance tax completely, it is possible to at least reduce the amount that will become due. This is sometimes known as ‘Inheritance tax planning’ and contrary to what many may believe, is a perfectly legitimate way of reducing the Inheritance tax bill that your estate will be due to pay.  

At Wilson and Fish, our lawyers provide specialist advice on how to reduce the Inheritance tax that your estate will be liable for. 

What is Inheritance tax?

As mentioned above, Inheritance tax is a tax on the value of your estate when you pass away.  The level of tax that your estate will be required to pay will depend on its value on the day of your death.   

If your estate is valued below £325,000 then no Inheritance tax will be due.  This is known as the ‘nil-rate’ band of Inheritance tax.  £325,000 may sound like a lot of money, but the ‘nil-rate’ band can be exhausted very easily, when all of your property is valued e.g. house, car, investments etc. If your estate is valued above £325,000, anything above that amount will attract 40% in Inheritance tax.

What can I do to reduce my Inheritance tax bill?

Inheritance tax is calculated on its value at your death. The only way to reduce the bill that will be due is for the value of the estate to be reduced before you pass away. 

There are different options that can be used to reduce the liability of an estate for Inheritance tax purposes:

  1. Create a Trust

By creating a Trust, you are in fact taking a proportion of the value of your estate and putting it into a special vehicle. A Trust is a relationship between three different people, where part of your estate e.g. a sum of money, is passed from you, the ‘Trustor’, to another  person called a ‘Trustee’ who will care for it for the ‘Beneficiaries’. 

Generally you will have complete freedom to decide what the money held in trust is to be used for, e.g. set money aside to send future grandchildren to higher education, or to be used to support certain family members for the rest of their lives.

While they can be difficult to understand, the important point about Trusts is that they can be used to reduce the value of your estate. In turn, this will reduce the value of your estate for Inheritance tax.   

  1. Take advantage of tax allowances

In the UK there are certain ‘tax allowances’ that can be used to reduce the inheritance tax bill that your estate would otherwise generate. 

One of the most important tax allowances applies to partners or spouses. Most couples will give each other some of their estate during their relationship. Any such property will be exempt from any Inheritance Tax. 

There is also an importance allowance for married couples. This is known as the ‘nil-rate band’. It works in such a way that, if one half of a couple (married or civil partners) passes away, and the value of their estate is less than £325,000, then the estate will not be due to pay Inheritance tax. Furthermore whatever portion of the ‘nil-rate band’ remains unused, this can be passed on to the surviving partner or spouse for them to use.

  1. Give someone a gift

If you decide to give someone a gift, that would otherwise have been part of your estate, its value will not be included in calculating the value of your estate for Inheritance tax purposes. 

It is important to understand that only true ‘gifts’ can reduce the Inheritance tax liability your estate will have. A gift is something that you can no longer enjoy, or have the benefit of. Perhaps you have collected a number of pieces of jewellery, or antique pieces, or heirlooms over the course of your life that you wish to give to your family members.  Provided that you do so before you pass away, and no longer have any enjoyment of them, they will not be included in the value of your estate. 

  1. Providing for a loved one’s care

You may have had responsibility for caring for a family member, and be anxious to ensure that they are cared for when you pass away by leaving finances to be used to meet their needs. If you do so, this will not be included when calculating the value of your estate. 

While it may not be possible to completely avoid Inheritance tax, there are a variety of ways that can be used to reduce the inheritance tax liability that your family will be required to pay. The important point about Inheritance tax planning is that it should be done with the assistance of advisors that are familiar with the rules governing Inheritance tax. They will be able to give clear, detailed advice on how best to structure your affairs so to reduce the value of your estate as far as possible, so to reduce your estates liability for Inheritance tax. 

At Wilson and Fish, we regularly assist clients to reduce their liability to pay Inheritance tax. The rules governing tax in the UK are complicated, and need to attention of expert lawyers who understand how the apply in practice. Our team will work in partnership with you, to ensure that you understand the different options available to you. Our advice will always be clear, and tailored to reflect your needs. If you have any questions about Inheritance tax planning, please contact us today on 0141 222 7951.  

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