If you’re a UK domicile individual, and your spouse is non UK domicile, you may not be aware that upon the event of your death, they could be landed with a significant UK IHT bill depending upon the value of your assets at the date of death.
Transfers between UK domicile spouses is ordinarily free of IHT – or more accurately, IHT exempt. However, in order to avoid UK domiciles from marrying to remove their assets from the UK IHT regime, the exemption on inter-spousal transfers is not available where the receiving spouse is a non UK domicile.
For deaths that occurred before 6 April 2013, the exemption for transfers from a UK domiciled spouse to their non-domiciled spouse was limited to £55,000, plus the estate had the nil rate band available to it.
The exemption was capped some 30 years ago to parallel the nil rate band that was then in force at the time, applicable as at 14 March 1983. Since that time it has become more common for spouses or civil partners to have different domiciles.
Fast forward to the Finance Act 2013 and the exemption limit was increased to the nil rate band that was in force at the time. This came about from the European Commission arguing that the low cap was effectively discriminatory and contrary to EU rules. The Commission would formally request that the UK government review the difference in IHT treatment, which the government did by increasing the cap to current Nil Rate Band, £325,000 but not lifting the exemption altogether.
So, is there a way in which the non UK domicile spouse can enjoy exempt free transfers from his or her spouse? Yes, there is. By electing to become UK domicile either on their spouses death (must be made within two years of death) or via a lifetime election.
An election must be made by notice in writing and sent to HMRC. It must be made by the person who is not domiciled in the UK – so the non UK domiciled spouse. There is no prescribed form of election as such, but for HMRC to keep a record of your intention to be considered as UK domicile you need to include:
- Your full name and address, or address and name for the personal representatives who are making an election,
- Your date of birth and, if appropriate, your spouse’s date of death,
- The full name of your spouse or civil partner who is domiciled in the UK, and
- the date upon which the election is to take effect from (e.g. date of the correspondence).
- The election should be sent to:
WMBC Assets Risk Team (Elections)
Inheritance Tax
HM Revenue and Customs
BX9 1HT
IHT planning is complex therefore we suggest that you get specialist tax and financial planning advice before taking a decision to become UK domicile or making any other decision that is likely to have long term ramifications for your financial and investment planning.