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Case Study: New non-dom rules open new IHT planning options

New measures in this years Finance Act will introduce new planning opportunities by changind the IHT rules for non-UK domiciled spouses.

The problem: Your client is a UK domicile and is married to a non-UK domicile. They currently live in the UK, with their daughter who will shortly be attending university. University costs are an immediate priority but your client is concerned about minimising any inheritance tax liability payable on his death and has read that there has been some recent changes in IHT and non-domicile taxation. 

The solution: By utilising all available exemptions your client is able to make gifts which are not subject to inheritance tax and to assist his daughter while she is at university.

Some of the main exemptions available would be:

  • The Annual Exemption.

This is an amount that can be gifted free of IHT, currently the amount is £3,000 per tax year. Where the exemption has not been utilised in the previous year the amount can be carried forward, but only for the current year – giving a maximum of £6,000. This exemption is available per individual and there are no restrictions on the recipient of the gift.

  • Normal expenditure out of income.

A transfer of income will be exempt providing a number of criteria are met. Firstly, the transfer was made as part of the person’s (the transferor’s) normal expenditure; secondly, it was made out of natural income, for example from dividend payments, interest from investments or salary; thirdly, after allowing for all transfers which are part of normal expenditure, the transferor was left with sufficient income to maintain their usual standard of living, and lastly that the transfer is habitual or regular.

Additionally, recently announced changes mean that your client may have further options to consider, as they have a non-UK domicile spouse.

All individuals, irrespective of their domicile status, benefit from an IHT nil-rate band, currently £325,000. Transfers of assets between spouses and civil partners, whether they are gifts made during a person’s lifetime or a transfer of assets occasioned by the death of one of the couple, are generally exempt from IHT.

Up until the 6 April this year, if the spouse or civil partner receiving the assets was not a UK domicile, the amount that could be transferred free from IHT was limited to £55,000.

The Finance Bill 2013 confirms that from 6 April 2013, the lifetime limit on the value of the assets that can be transferred IHT free will be increased from £55,000 to the applicable nil-rate band, currently £325,000.

Also, under the new rules it is possible for non-UK domiciled spouses or civil partners, whose spouse or civil partner is UK domiciled, to elect to be treated as UK domiciled for IHT purposes. This means the non-UK domiciled partner would be entitled to the unlimited spouse exemption, but subsequent disposals made by them, which are not exempt and are in excess of the nil rate band, will be liable to inheritance tax, regardless of where the assets are located.

This provides greater opportunities for spouses (where one is a non-UK domicile) to share wealth in terms of ownership.

Eligible couples should ensure that they are fully utilising their available nil-rate bands, through making potentially exempt transfers. For example, both spouses could make a gift of £100,000 to their daughter which would be a PET that she could potentially use to buy a property while she is away at university.

However, it is important to consider that if a non-UK domiciled individual does elect themselves to be treated as UK domiciled, the election will only affect their status for IHT purposes.

Additionally, elections are irrevocable while the electing individual continues to remain resident in the UK. An election will cease to have effect if the electing person is subsequently resident outside the UK for more than four consecutive tax years.

The legislation will come into effect when the Finance Bill 2013 receives Royal Assent.

Rachael Griffin is head of technical marketing at Skandia

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