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Murray Beith Murray is a leading Scottish private client law firm.

For over 170 years we have specialised in meeting the legal, financial and administrative needs of individuals and families, family trusts, charities and private companies.

3 minutes reading time (698 words)

Proposed Inheritance Levy Could Affect Over 90% of Scottish Estates

adam swayneA recent report from the Institute for Public Policy Research (IPPR) Scotland has proposed changes to local taxation which could hit 92 per cent of all Scottish estates. Among its proposals, the IPPR suggests a 10% local Inheritance Tax (IHT) rate which could apply to all Scottish estates valued at over £36,000. 

The report, which offers several potential reforms to local taxation, has been welcomed by the Scottish Government. The IPPR believes the proposals will allow a greater ability to use local tax powers to deal with key priorities, such as climate change, and reducing poverty and inequality. According to the think tank’s data, implementing the suggested changes could raise between £200 and £300 million of additional revenue per year.

But what could this mean for individuals and those appointed as executors in Scotland?

What is the current IHT threshold?

The UK-wide IHT threshold is currently set at £325,000. If the value of the deceased’s estate does not exceed this amount, there is usually no IHT to pay. If a house is passed on to children or grandchildren, the threshold can increase to £475,000. Married couples and civil partners can combine their IHT thresholds, meaning the first £950,000 of their combined estate can be free from IHT.

If a person leaves everything over the threshold to their spouse, civil partner, charity or community amateur sports club, IHT is typically not paid. Transferring to a spouse or partner has resulted in half of all estates, and 65% of the value of all estates above the threshold, paying no IHT.

Anything that exceeds the IHT threshold, and that is not exempt, is currently taxed at a marginal rate of 40%.

In 2015/16, the latest year for which statistics are available, IHT raised £4.3 billion throughout the UK, with £213 million coming from Scotland. According to the IPPR report, only 2.2% of deaths in Scotland are liable for IHT (compared to 4.2% across the UK).

With the amount raised through IHT more than doubling in less than a decade, HM Revenue and Customs (HMRC) figures show IHT receipts have increased 3% to a record £5.4 billion during 2018/19. Of this, 72% was collected from estates valued at £1 million or over, with the average liable estate paying £179,000 of tax.

What are the IPPR’s proposed IHT changes?

The IPPR suggests that a local Inheritance Tax could be applied in one of two ways:-

  1. A 10% marginal tax rate on all estates worth more than £36,000; or
  1. If designed to work around the current UK-wide IHT system, estates between £36,000 and £325,000 would pay a marginal tax rate of 20%, with those above the current IHT threshold continuing to pay at 40%.

The introduction of this local taxation could also place a legal obligation on executors to ensure that the tax is paid to a collection agency in Scotland (such as Revenue Scotland), in the same way that UK IHT is currently paid to HMRC.

What is potential impact of the IPPR’s proposed local IHT?

Whereas under the current regime the majority of estates in Scotland fall below the IHT threshold, it is estimated that the IPPR’s suggestions could affect around 22,500 estates (92% of all estates in Scotland), with the average tax bill under the proposed system approximated at £24,000.

How Can You Reduce Your IHT Liability?

With careful preparation, you can significantly reduce your IHT liability. Having a professional and qualified estate planning lawyer who has knowledge of current legal changes and who can offer first-class legal guidance is always recommended. For more information, speak with a member of our Estate Planning team today.

Specialist Estate Planning Solicitors, Edinburgh

If you have any questions about the issues covered here, or if you would like to discuss estate planning with our lawyers, please call us on 0131 225 1200 or fill in our contact form.

Our personal, attentive service coupled with sage, astute and commercially-minded guidance, allows us to build long-term, ongoing relationships with our clients, helping them to protect assets throughout generations. Our highly personal service reflects our culture, which is centred on integrity and trust, and the expert guidance we provide has been designed to be an investment, not an expense.

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