Surviving spouse exemption for a non-domiciled spouse of a UK domiciled deceased.
Today most of us – especially if we are considered to be UK domiciled – might take the ability to transfer without limit assets from one spouse / civil partner to another for granted. But the situation is different where the transferee spouse is not UK domiciled. For many years a non-domiciled transferee could receive up to only £55,000 as an exempt transfer although from 2013 the limit has risen to £325,000.
This means that a non-UK domiciled surviving spouse could receive up to £650,000 tax free from their late spouse/civil partner. This is made up of £325,000 inter-spouse exemption and £325,000 nil rate band.
Transfer of assets above the tax threshold will still be subject to Inheritance Tax at 40% on death and the value of any gifts made by the UK domiciled spouse to the non-UK domiciled spouse within seven years before death will reduce the tax threshold (unless these are eligible for any other exemptions).
Hence there are still significant limitations on the amount which a UK domiciled spouse/civil partner can transfer to his or her non-UK domiciled spouse/civil partner both during lifetime and on death.
In 2013, provisions were introduced to allow non-UK domiciled spouses or civil partners to elect to be treated as if they are UK domiciled for Inheritance Tax purposes. This election can be made by an individual during their lifetime, or by their personal representatives within two years of their death. The effect of the election is that transfers between spouses/civil partners, whether during life or on death can be made with full exemption from IHT. There is a potential sting in the tail here in that on the non-UK domiciled spouse’s death, their worldwide assets would be subject to UK Inheritance Tax and that could be disadvantageous if that spouse had significant overseas assets in their own name.
Once made, the election cannot be revoked, although in certain circumstances the election can cease to have effect.
Meanwhile following changes announced in the 2015 summer budget, the Government has sought to increase the numbers of individuals who might be considered to be UK domiciled. From 5 April 2017, individuals may be deemed to have acquired a UK domicile if they have been resident in the UK for 15 years – down from the current 17 years. With the delay in introducing this measure, there is still a window of opportunity for potential planning including the judicious use of offshore trusts, for example.
Arnold Hill would be happy to discuss any of the above and work with you to craft a solution specifically tailored to your needs.
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The information in this article is believed to be factually correct at the time of writing and publication, but is not intended to constitute advice. No liability is accepted for any loss howsoever arising as a result of the contents of this article. Specific advice should be sought before entering into, or refraining from entering into any transaction.