As the old saying goes, there’s nothing more certain than death and taxes. But when they both arrive around the same time, it can be financially devastating for your family. However, there are steps everyone can take to mitigate or eliminate Inheritance Tax (IHT).

When does Inheritance Tax apply?

If your net estate is over £325,000, your estate will usually need to pay IHT. Your net estate is made up of all your assets, property and investments less all your debts. Any surplus over the £325,000 allowance is then subject to IHT at a rate of 40%. Of course, as with all taxes, there are allowances and exemptions that will allow you to mitigate or eliminate Inheritance Tax.

What IHT allowances are available?

If you decide to leave your entire estate to your spouse or civil partner, there will be no IHT payable. But if you are cohabiting with a partner but are unmarried, you cannot take advantage of this allowance.

You can lose this benefit if you fail to make a Will because part of your estate might pass to your children.

Prior and Legal Rights

When you fail to make a Will, your estate will be dealt with under the Law of Succession in Scotland. That means your spouse or civil partner is entitled to:

• The family home (up to the value of £473,000);
• The contents and furniture in the family home (up to the value of £29,000);
• £50,000 where the deceased had children or £89,000 where there are no children.

Prior Rights only apply where there is no Will. Once these have been satisfied or where the deceased made a Will, both the surviving spouse or civil partner are entitled to Legal Rights. Legal Rights only apply to the moveable estate. The moveable estate is any estate that is not generally made up of land and buildings.

The spouse or civil partner and children are entitled to Legal Rights as follows:

• Where there are no children, the spouse or civil partner is entitled to one half of the moveable estate.
• Where there are children, the surviving spouse or civil partner is entitled to one third of the moveable estate and the children are entitled to one third of the moveable estate. The children’s one third of the moveable estate is shared equally amongst them.

You may wish to find out more about children’s rights in our article on how you cannot disinherit your children in Scotland.

What happens to the remainder of the estate where there is no Will?

Once the Prior Rights and Legal Rights have been exhausted, if there remains any estate, whether it is heritable (generally land and buildings) or movable will be shared out depending on the family circumstances.

Where there are children, they will inherit the remainder of the estate. Where there are no children, since 1 April 2024, the surviving spouse or civil partner will inherit the remainder of the estate. Before 1 April 2024, the remaining estate would have been shared between the parents and siblings of the deceased.

Clearly, if you wish to control who should inherit your estate, you need to make a Will.

Extending your tax-free allowance

You can decide to leave the family home or your share in the family home to your children or grandchildren. If you do this, your tax-free allowance will increase to £500,000. However, to benefit from this extended allowance, your net estate must be worth less than £2 million.

Making gifts during your life to mitigate or eliminate Inheritance Tax

When you make gifts during your lifetime, this may mitigate or eliminate Inheritance Tax liabilities.

If you gift all or part of your assets, property and investments and you survive for seven years, the value of those assets, property and investments may fall outwith your estate for IHT purposes.

There are, however, some rules around this seven-year rule, one of which is that you cannot benefit from the item.

One of the most common gifts is a gift of the family home to children. However, if you make this gift but continue to live in the house rent free, it will be considered a gift with reservations. Where you continue to benefit from something you have gifted, it will be considered to be part of your estate.

However, if you gift the family home and remain living in it and pay a market rent and share of the bills and survive for at least seven years, no IHT will be payable on the value of the house.

Annual gifts

You can make annual gifts up to the value of £3,000. You can make any number of gifts of £250 in each tax year. There are also marriage gifts you can make. In addition, you can make a marriage gift of £5,000 to a child, £2,500 to a grandchild or £1,000 to anyone else.

All these lifetime gifts which reduce the value of your estate are not included for IHT purposes.

Gifting to Charities to mitigate or eliminate Inheritance Tax

Gifts to charities during your lifetime cannot be called back into your estate for IHT purposes. In addition, any gift you make to charity in your Will, is deducted from the net value of your estate. If you gift 10% or more of your estate to charity, the rate of IHT is reduced from 40% to 36%. This can lead to a considerable saving in large estates.

You can read more about how Inheritance Tax works: thresholds, rules and allowances on the Gov.UK website.

Everything starts with taking advice from our Specialised Estate Planning and Wills Solicitors in Dunfermline, Fife

If you would like to discuss how you can mitigate or eliminate Inheritance Tax, the first step you should take is to speak with Stacey Parker. Stacey has years of experience in advising clients on their options when it comes to making Wills and estate planning,

Everything starts with a comprehensive review of your estate and how you would like to deal with this in your Will.

To reach out to Stacey, you can make an appointment by calling her on 01383 629720 or email Stacey by clicking here.