Inheritance tax (IHT), capital gains tax (CGT), and income tax (IT) are three types of taxes to consider when planning and managing your estate.
Without proper planning, your beneficiaries may incur significant tax burdens, reducing the assets they inherit. Fortunately, you may be able to structure your assets in a more tax-efficient way so your family members are financially protected when you pass away.
However, you’ll need the guidance of an estate planning lawyer to navigate these complex matters. In this guide, we’ll highlight the relevant taxes associated with estate planning in Scotland and how implementing effective estate planning strategies may help to minimise them. If you’re looking for the best estate planning services in Scotland, reach out to Jones Whyte’s Glasgow-based team today.
We can offer estate planning services throughout the UK excluding N.I. We offer an initial consultation together with preparation of a bespoke plan of action for £450+VAT.
Table of Contents
- Why you should consider tax implications in estate planning
- Estate taxation in Scotland: Explained
- How estate planning solicitors can help
- The benefits of using Jones Whyte’s estate planning department
- Key takeaways
- Frequently asked questions
Why You Should Consider Tax Implications In Estate Planning
Understanding tax implications in estate planning is crucial for effective estate administration and the management of your affairs after you pass away.
Here are a few key reasons why you should consider these implications:
- Maximising inheritance: By trying to minimise the inheritance tax bill, you may be able to help your loved ones receive more of your assets.
- Financial security: Tax planning could help protect your family’s financial security after you die.
- Peace of mind: Knowing your estate is tax efficient provides peace of mind and reduces potential family disputes.
Estate Taxation In Scotland: Explained
Here, we look at three main types of taxes relating to estates in Scotland:
- Inheritance
- Capital gains
- Income
Fortunately, several reliefs and exemptions can be used in estate planning to reduce the tax burden for your beneficiaries, which we’ll cover below.
Inheritance tax
Inheritance tax is a government tax paid on a deceased person’s estate. The current inheritance tax threshold (or nil-rate band) is £325,000 for 2024/25, as set by HM Revenue & Customs (HMRC). Estates valued over this amount will be charged 40% IHT.
Estates consist of your property, finances, investments and personal possessions. When you pass away, the total value of your assets is added up, and any outstanding debts or liabilities are deducted from this amount. IHT applies to the difference of this sum.
For instance, if your estate is worth £420,000 but you’re £69,000 in debt, your remaining estate would be valued at £351,000 (420,000 – 69,000), with IHT implications of £10,400.
Let’s explain:
- Gross estate value = £420,000
- Debts/liabilities = £69,000
- Net estate value = £351,000
- IHT threshold = £325,000
- IHT tax payment = £10,400 ([351,000 – 325,000] x 40%)
Capital gains tax
In Scotland, capital gains tax (CGT) is a tax paid on the profit you make when “disposing” of certain assets that have increased in value. Disposing refers to selling, gifting, or transferring assets, with taxation applying to the profit (“gain”) made, not the total sale amount.
If the gains from disposed assets exceed the CGT annual exemption threshold (£3,000 for 2024/25), there will be capital gains tax to pay, which the executor/s must file via an estate tax return.
Taxable assets include:
- Business assets
- Shares
- Land and property
- Most personal possessions worth £6,000+
For example, if shares of £10,000 are sold for £18,000, the taxable CGT amount would be £5,000 (8,000 – 3,000), provided the annual CGT exemption hasn’t already been used.
Additionally, different rates for CGT apply depending on your income tax bracket. Here are the latest rates, effective from October 2024:
- Basic rate taxpayer = 18%
- Higher rate taxpayer = 24%
Income tax
Income tax (IT) is the tax paid on the money you earn, with the rates and bands set for various earning thresholds. Your estate is still liable for IT payments during the executry period. This period refers to the time between your death and the final distribution of your estate, which is handled by the executor/s of your will.
Furthermore, income generated from estate assets, such as rental incomes, dividends from investments, or interest from savings (after your death), are also subject to IT with the following tax rates:
- Profit from rental income = 20%
- Dividends = 8.75%
The executor/s are responsible for reporting any income and filing tax returns with HMRC on behalf of the estate. It’s important to note that tax-free allowances that apply when you are alive do not carry over to your estate after your death.
Other estate taxes
- Land and Buildings Transaction Tax (LBTT)
- VAT
How Estate Planning Solicitors Can Help
Using Jones Whyte’s estate planning solicitors ensures your estate is handled efficiently and professionally. We’ve helped thousands of clients with:
- Inheritance tax planning: Ensuring your loved ones receive the full benefit of your estate.
- Trusts: Setting up and administering trusts (including life interest trusts) to manage money, property or investments.
- Succession planning: Planning for future business continuity.
- Planning for care home fees: Ensuring asset protection in later life.
Reducing an inheritance tax bill involves careful planning and using the available allowances and reliefs, which need to be outlined in your will and estate plan with the help of a solicitor.
While our estate planning team offer guidance on implementing various tax planning strategies, it might not guarantee a reduced tax bill.
Here are a few strategies available:
Nil-rate band
The nil-rate band refers to the inheritance tax threshold of £325,000. This means the estate is tax-free if the total value falls below this amount.
Residence nil-rate band (RNRB)
If you leave a house to direct descendants (children or grandchildren), you can benefit from an additional £175,000 inheritance tax relief, increasing the tax-free threshold to £500,000. Your RNRB can double to £1 million when it’s combined with your spouse or civil partner.
However, there are restrictions on estates that are valued at £2 million+.
Lifetime gifts
While you’re alive, you can give away up to £3,000 worth of assets each year without it being added to the value of your estate for inheritance tax purposes.
Gifts include:
- Money
- Household and personal goods like jewellery or furniture
- A house, land, or buildings
Gifts between spouses and civil partners are also IHT-exempt. You can give your spouse as much as you’d like during your lifetime as long as they are:
- Permanent UK residents
- Legally married to you or in a civil partnership with you
Additionally, wedding allowances are also available, such as:
- Given to a child (£5,000 or less)
- Given to a grandchild or great-grandchild (£2,500 or less)
- Given to another relative or friend (£1,000 or less)
However, these gifts must be made before the wedding, and the wedding has to happen for the amount to be IHT-exempt.
Charitable donations
Leaving at least 10% of your net estate to charity can lower the inheritance tax rate on your remaining estate from 40% to 36%.
Trusts
When assets are placed in a trust, they generally are not included in your estate for inheritance tax purposes. This means that when you die, the trust (a separate legal entity) owns these assets, shielding them from potential IHT obligations.
Spousal exemption
Generally, any assets passed from one spouse to another, whether during your lifetime or after death, are exempt from inheritance tax. This means there is no limit on the value of assets transferred between you and your spouse or civil partner.
With the help of estate planning lawyers, these asset distributions must be stated in your will and estate plan.
The Benefits Of Using Jones Whyte’s Estate Planning Lawyers
You can’t go wrong with Jones Whyte’s estate planning solicitors on your side—here’s why:
- Legal expertise: With decades of combined experience in estate administration, our legal team provides the best legal advice. From inheritance tax to effective estate planning, rest assured we have your best interests at heart.
- Reputation: We are proud of our 4.8/5 Trustpilot rating, confirming our position as one of Scotland’s leading law firms.
- Compliance: Our team of over 240 legal executives, solicitors and professional business support staff are accredited by the Law Society of Scotland, assuring your estate, will, and trust structures adhere to Scots Law.
- Tailored approach: We understand no two estates are the same and take a personalised approach for each of our clients. We’ll work with you to find the most tax-efficient way to structure your assets so your loved ones receive the inheritance they deserve.
Key Takeaways
- Understanding tax implications in estate planning is crucial for the effective administration and management of your affairs after you pass away.
- Inheritance tax (IHT), capital gains tax (CGT), and income tax (IT) are the three main tax implications you should consider in estate planning.
- The current inheritance tax threshold for 2024/25 is £325,000. Estates valued above this limit are charged the standard 40% IHT rate.
- Capital gains tax (CGT) is a tax paid on the profit you make when disposing (gifting, selling, transferring) assets that have increased in value. The annual threshold exemption is £3,000 per person.
- Income generated from your estate after your death, such as rental income, dividends from investments, or interest from savings, is subject to income tax based on your income tax bracket.
- Estate planning solicitors can potentially help reduce inheritance tax bills. A few strategies include setting up trusts, using the nil and residence nil-rate band allowances, gifting assets, and making charitable donations of at least 10% of your net estate value.
- Jones Whyte’s qualified estate planning lawyers are accredited by the Law Society of Scotland, ensuring compliance at every tur
Jones Whyte Is Here To Help
As you can see, there are many tax implications to consider in estate planning. With professional legal advice, you can effectively update your will and implement various tax-efficient strategies that could help reduce the tax burden left to your beneficiaries, depending on your estate’s circumstances.
If you’re looking for the best estate planning services in Scotland, reach out to Jones Whyte today.
Please note: This article is for general information purposes only and does not constitute legal advice. It should not be relied upon as a substitute for professional legal advice tailored to your specific circumstances. If you need advice on a legal matter, get in touch with our team.
