Domicile and the inheritance tax spouse exemption
Spouse relief and non-domiciled individuals
Since the Finance Act 2013, UK domiciled individuals who are married to or in a civil partnership with a non-UK domiciled person have been potentially on an equal footing for inheritance tax (IHT) purposes with couples who are both domiciled in the UK. However, positive action is required to take advantage of this.
The previous position
IHT is payable on death on estates in excess of the prevailing nil rate band, which currently stands at £325,000 (ignoring the residential nil rate band). In addition, it is payable on lifetime gifts which exceed the nil rate band to most trusts.
One of the most frequently claimed exemptions from IHT is the spouse exemption. The exemption means that all assets passing on death to a surviving spouse or civil partner, or given by lifetime gift, are exempt from IHT in the case of a couple who are both UK domiciled. Until the Finance Act 2013, however, the spouse exemption was limited if the transfer was made by a UK domiciled individual to their non-UK domiciled partner. The limit to the spouse exemption in those circumstances was set at £55,000 and had remained at this level for some years.
Domicile is a complex legal concept but, in basic terms, an individual acquires a domicile of origin at birth (usually their father’s domicile) but can acquire a different domicile of choice if he or she later moves to another country with the intention of remaining there permanently or indefinitely.
Take the example of George who is UK domiciled and married to Martine, who retains her Canadian domicile of origin. On George’s death in 2012, his Will leaves his £2 million estate to Martine outright. George’s executors can claim the IHT nil rate band of £325,000 but the spouse exemption is limited to £55,000, meaning that IHT is payable on his estate of £648,000. If Martine had acquired a domicile of choice in the UK then a full spouse exemption would have been available, reducing the IHT to nil.
The situation now
Following the changes introduced in the Finance Act 2013, the situation has improved for couples like George and Martine. If no action is taken, George’s estate would be entitled to the nil rate band and to a spouse exemption also equivalent to the nil rate band. This means that £650,000 would be tax free and the IHT would be reduced to £540,000 without further action.
However, under statutory provisions, Martine could elect to be treated as UK domiciled for IHT purposes. This election would have to be made within two years of George’s death and would ensure that the full spouse exemption is available on George’s estate, meaning that no IHT would be payable. For the election to remain effective, the provisions require Martine to become UK resident for income tax purposes for a period of four successive tax years. This can begin at any time after the election is made; otherwise the election automatically ceases to have effect at the end of that period.
Advice is required
Careful thought needs to be given to the consequences before opting for the election, which is irrevocable. Consideration also needs to be given to the effect of any applicable IHT treaty.
The election by a non-domiciled surviving spouse will bring his or her worldwide assets within the UK IHT net. The situation needs to be considered in the round and, given the fluidity of many people’s situation following a bereavement, it may be precipitate to enter into an election too soon following a death. The two year time window in which to make the election can be used to ensure that a carefully considered assessment is made.
Contact an inheritance tax specialist
This is a complex area of law and detailed advice should always be sought. If you would like to speak to one of our specialist advisers please call us today on 0800 422 0123 or get in touch online. Your initial consultation is free. Our specialist solicitors are based in Birmingham, Bristol, Cardiff, London, Manchester, Southampton and Taunton are ready to discuss your case.