Transfers to Non-Domiciled Spouses/Civil Partners

Inheritance tax is based on domicile status.  There’s no strict definition of domicile, but it’s taken to be where you consider your permanent home to be. If you’re a UK domicile, then you’ll pay IHT on your worldwide assets, and if you’re not, then just your UK assets will be caught in the IHT net. This article provides an explanation and example of how domicile status affects IHT liability when a transfer occurs between spouses/civil partners.

THIS ARTICLE IS RELEVANT TO EXAMINABLE TAX YEAR 2017/18.

If both spouses/civil partners are UK domiciles, then any transfer between them is free of IHT with no limit.  However, where the recipient spouse/civil partner is not a UK domicile, then there is a limit on the exemption of £325,000.

If a non-UK domicile married to a UK domicile wants to, they can elect to be treated as UK domiciled for IHT purposes.  So they would enjoy an unlimited spouse exemption and so avoid the cap, but their worldwide assets would be caught in the IHT net rather than just their UK assets. An election can take place during lifetime – in which case, it takes effect from the date of the election or there can be an election on death within 2 years – in which case, it takes effect from the date the UK domiciled spouse died.

Once the election is made, any assets that are inherited from the UK domiciled spouse are free from IHT.

Example

Let’s look at an example:

Ben and Lindy are married.  Ben is a UK domicile and Lindy still retains her Swedish domicile. On Ben’s death, his £1m estate is left to Lindy.  Ben’s nil rate band can be used, but the spouse exemption is limited to £325,000.  This means that £350,000 of Ben’s estate is liable to IHT.  If Lindy elects to be treated as UK domiciled for IHT, this would mean the full spouse exemption is available and no IHT would be payable.

Changes to The Deemed Domicile Rules

And whilst we’re on the subject of domicile:  the changes to the deemed domicile rules have been re-instated and will apply retrospectively from April 2017.

Non-UK domiciled individuals who have been UK resident for 15 out of the last 20 tax years will be deemed UK domiciled for all tax purposes (and applies from the 16^th year).

Also, those who have a UK domicile at birth and then become domiciled overseas will revert back to being classed as UK domiciled for tax purposes if they become UK resident.

UK domiciles who have been UK resident for at least 15 tax years and then emigrate and establish a domicile of choice overseas will be deemed to be UK domiciled for 5 five years after departure (instead of the three years that applied when the rule was 17/20 years).

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