Inheritance Tax Reliefs in Scottish Executries: What Every Executor Should Know

Following the loss of a loved one, the responsibility of administering their estate can feel overwhelming at an already difficult time. Alongside the grief of bereavement, Executors are faced with the reality of dealing with the complex legal and financial obligations involved in the Executry administration process.

Before considering the inheritance tax reliefs and exemptions that may be available, it is helpful to start with the basics: what is an Executry and what role does an Executor play?

Understanding Estates, Executries, and Executors

In Scotland, an “Estate” comprises the assets, liabilities and financial affairs of a person who has died.

An ‘Executry’ is the legal process of administering the deceased’s Estate and ensuring that their affairs are properly concluded.

The “Executors”, often also referred to as personal representatives, are the people appointed by the deceased in their Will to administer the Estate and complete the Executry process. The Executors are responsible for gathering in the assets, settling any debts and taxes due, obtaining Confirmation from the court (where required), and ultimately distributing the Estate to the beneficiaries in accordance with the deceased’s Will.

Being appointed as an Executor carries significant responsibility. It is a role that should be entrusted to someone the deceased has confidence in to carry out their wishes. Often this will be a close family member or loved one. During what is inevitably an emotionally challenging time, the responsibility of administering an estate can add further stress and place additional pressure on Executors. This time-consuming and often complex process can understandably feel daunting. Even the simplest of Executries can take around one year to complete.

Every estate is different, however understanding the key legal and tax considerations of an Executry can provide reassurance, reduce uncertainty and help make the process more manageable.

One of the first steps in the Executry process is to establish the full value of the Estate, including all assets and liabilities. Once you have that headline figure you may be left wondering about the level of tax liability that could be looming, but also what exemptions are or could be available to alleviate any tax due.

Key Inheritance Tax Considerations

Inheritance Tax (IHT) is one of the principal tax considerations following a death. An estate’s liability for IHT is calculated based on the value of the deceased’s estate, taking account of assets, liabilities, exemptions and available reliefs.

The good news is that a number of exemptions and reliefs may be available depending on the circumstances of the Estate.

Nil Rate Bands

Standard Nil Rate Band

Every individual qualifies for the standard Nil Rate Band (NRB) which is a tax-free allowance for the first £325,000 of the estate. The estate is taxed at 0% for the first £325,000 so if the estate falls below that sum then there is no IHT to pay!

If the estate exceeds this amount, then IHT is applied at 40% to sums that exceed this threshold.

This however isn’t the end of the calculations.

Residence Nil Rate Band

An additional allowance may apply, which would further reduce the IHT bill even further. The Residence Nil Rate Band (RNRB) is an additional allowance of up to £175,000 that can be applied if the deceased leaves their main home directly to children, grandchildren or other direct descendants. The combination of the NRB and the RNRB could potentially give the estate a tax-free allowance of up to £500,000 (£325,000 + £175,000).

In broad terms, this means that an individual’s Estate may benefit from inheritance tax allowances of up to £500,000 where the conditions for the Nil Rate Band and Residential Nil Rate Band are met. Anything over this the standard Inheritance tax liability of 40% will apply to sums over this value.

Transfers Between Spouses and Civil Partners

Different considerations apply where the deceased was married or in a civil partnership. If the deceased leaves estate assets to a husband, wife, or civil partner inheritance tax does not apply to this transfer and does not use up any of the deceased’s allowances noted above. The transfer is carried out completely tax-free. This means that on the first death there is often part (or the whole) of an allowance left over. Any unused allowance may be transferred to the surviving spouse or civil partner’s Estate.

If a spouse or civil partner dies and does not fully use their NRB or RNRB, the unused percentage can be transferred to the surviving partner’s estate. The combination of Nil Rate Bands potentially allows married couples or civil partners to pass on up to 1 million pounds tax-free on the second death. You could only achieve this headline figure however if the RNR applies and this will not always be the case.

Charitable Legacies

Further exemptions to Inheritance Tax can apply if the deceased leaves all or part of their estate to charities or political parties, as these legacies can be exempt from IHT. Whilst it does not make the estate completely exempt, if the deceased leaves 10% or more of their net estate to a qualifying charity, then HMRC reduces the rate of IHT from 40% to 36%.

Agricultural Property Relief and Business Property Relief

Where an estate includes agricultural or business assets, it is important to consider whether additional reliefs may be available.

Agricultural Property Relief (APR) and Business Property Relief (BPR) may apply to qualifying agricultural land, buildings used for farming and certain business assets. These reliefs are designed to help protect working farms and family firms having to be sold or from being broken up to pay IHT.

These are complex allowances and, as with individual reliefs, professional advice would be advisable to ensure the allowances are correctly applied.

Potentially Exempt Transfers

You must not overlook gifts made by the deceased within seven years of their death as they may also be subject to IHT. This, however, depends on the individual circumstances and there are allowances and taper reliefs available to consider.

Payment of Tax

In Scotland you cannot apply for Confirmation (the legal document that gives the Executor authority to manage and distribute the estate), until the IHT has been paid to HMRC, whether in full or by installments. It’s also worth bearing in mind that there is a 6-month deadline before IHT interest begins accruing after the end of the month in which the person died.

Every Estate is Different

Every Estate is unique and the availability of inheritance tax reliefs will depend on the assets, liabilities and personal circumstances involved. Seeking professional advice at an early stage can help ensure that all available reliefs and exemptions are identified and applied correctly while reducing the risk of delays, disputes or costly mistakes

If you are acting as an Executor or would like guidance on any aspect of estate administration in Scotland, our experienced Private Client team would be happy to assist. Please contact us to discuss your circumstances and obtain tailored advice.