The 2013 Budget introduced two important changes to the inheritance tax (IHT) rules that will benefit couples where one partner is domiciled abroad.
From 6th April the IHT exemption on gifts to a non-domiciled spouse has been raised from £55,000 to £325,000 and non-domiciled spouses have been given the option to elect to be UK domiciled for IHT tax purposes.
Domicile is a concept that has no precise legal or statutory definition. It has nothing to do with residence, so a person stationed abroad for work will still be domiciled in the UK.
And it has little to do with nationality, as an Englishman who has settled in the States might have acquired US domicile for example. It is more to do with a sense of homeland or mother-country. At birth everyone has a domicile of origin, for example the domicile of one’s father in the case of a child living with the father, and one can acquire a new domicile – called a domicile of choice – by moving to another country with the intention of settling there permanently.
However, there is also what is known as deemed domicile for IHT purposes. If you have been resident in the UK for 17 of the last 20 years before a gift or death that gives rise to an IHT event, you will be deemed to be UK domiciled for IHT.
But non-domiciled individuals have generally been treated differently for IHT; they only have to pay IHT on assets that are situated in the UK, whereas UK domiciled taxpayers must pay IHT on all that they own, even foreign assets.
Obviously it would be easy for a UK taxpayer to avoid IHT by transferring assets to a non-domiciled spouse who would then move them abroad. And that is why the exemption for gifts between spouses has always been limited where the gift is to a non-domiciled spouse. From the mid 1980s the limit stood at £55,000 (the nil rate band at the time), so the increase to the current nil rate band of £325,000 is being hailed as long overdue.
The other reform is that a non-domiciled spouse can now elect to be treated as having UK domicile for IHT purposes and, by doing so, qualify for an unlimited spouse exemption. Once made, the election cannot be revoked while the individual is living in the UK. But if the individual leaves the UK and lives abroad for more than four years, the election will no longer be effective.
Said private client expert Kalpa Prajapati, Solicitor of Greenwich-based solicitors Grant Saw : “This is an issue that is becoming more and more common with globalisation. It will be important to weigh up the advantages of an unlimited spouse exemption against the disadvantage of having all one’s worldwide assets made subject to IHT.
“It is likely to be advantageous to young international professionals who are quickly accumulating wealth in the UK but who do not as yet have wealth abroad. Although it’s likely to be a different calculation for taxpayers in middle age or later who have either had time to accumulate wealth abroad or who have inherited from their parents.”
This is not legal advice; it is intended to provide information of general interest about current legal issues.