Helpful IHT change for non-domiciles
The exempt amount that a UK-domiciled individual can transfer to their non-domiciled spouse or partner free of inheritance tax (IHT) has increased to £325,000 – the same level as the nil rate band – from 6 April 2013.
Transfers between spouses and between civil partners are exempt from IHT, either during their lifetimes or at death. But until now, where one spouse/partner is not UK domiciled, the exemption has been restricted to a paltry lifetime limit of £55,000. In future, the exemption will be linked to the level of the nil rate band.
That’s straightforward enough, but as of 6 April 2013 it is now also possible for someone who is domiciled outside of the UK, but with a UK domiciled spouse/partner, to elect to be treated as UK domiciled for IHT.
For example, Mike is UK domiciled and has assets of £2 million; his wife Sophie is non-UK domiciled and has assets of £600,000, of which £450,000 is situated overseas. After making the election, the whole of Mike’s £2 million estate can pass to Sophie, although she is non-UK domiciled, free of IHT. However, the downside is that Sophie’s £450,000 in overseas assets will be brought within the scope of IHT.
It is possible to make an election any time after marriage or registration of a civil partnership, and the latest possible date is two years following the death of the UK domiciled spouse/partner – provided they died after 5 April 2013. An election can be backdated for up to seven years (but not earlier than 6 April 2013), so that any lifetime transfers during that period are covered. If the election is made following the spouse’s or partner’s death, it is treated as being made immediately before the death.
An election is irrevocable, but it will cease to have effect if that person becomes resident outside the UK for four consecutive tax years. Whether to make an election will need careful consideration, so please contact us if you need advice.