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IHT and non-UK domiciled spouses

It is quite a long time since I have seen any articles in the trade press regarding trans-fers of value to a non-UK domiciled spouse for inheritance tax purposes.

This is an important subject where relevant as, with the cosmopolitan members of the population of the UK, there are more and more marriages between UK and non-UK domiciles. The rules where a “non-domiciled” wife automatically took the domicile of her UK-domiciled husband at the time of the marriage have long gone.

As is well known, any transfer of value between UK domiciled spouses is exempt under section 18(1) of the Inheritance Tax Act 1984. This does not, however, operate as far as transfers by a UK-domiciled spouse to a non-UK domiciled spouse.

In these circumstances, section 18(2) of the Inheritance Tax Act 1984 restricts the exempt amount to a total of £55,000. Any higher amounts which are (or become) chargeable are assessed to IHT in full. An example will help.

Mr UK Dom is married to Mrs Non-UK Dom. He has made no potentially exempt or chargeable transfers in his lifetime and dies in tax year 2001/02 leaving all his taxable assets to his widow.

His assets, all UK situs, amount to £1million. How much IHT will be due by reason of his death?

Estate £1,000,000

Exempt amount £55,000

Nil rate band £242,000

Taxable amount £703,000

Tax at 40% £281,200

Net to Mrs

Non-UK Dom £718,800

As all Mr UK Dom&#39s assets are UK situs (and presuming that they remain so) then on Mrs Non-UK Dom&#39s subsequent death they will again be subject to IHT. There may be a measure of quick succession relief to reduce the amount of tax payable on her subsequent death if this occurs within 5 years of the death of Mr UK Dom.

To avoid IHT on her subsequent death Mrs Non-UK Dom could take some action. She could convert the assets into non-UK situs assets if that was possible – then, if she dies whilst still a non-UK domicile, these assets would not be assessable to UK IHT.

Care would need to be exercised to make sure that they will not be assessable to “death duties” in any other country – some reference to any appropriate double tax treaty may also be useful.

A different course of action she could take would be to marry again – to another UK domicile – then leave the assets to him, probably within an interest in possession trust to protect the position of any children she may have had with Mr UK Dom.

Transfers from a non-UK domicile to a UK domicile are exempt – it is only when they go the other way that there is a problem.

Of course, any planning, either while Mr UK Dom and Mrs Non-UK Dom are still alive or after Mr UK Dom&#39s death (presuming he dies first), will have to be tempered by the fact that Mrs Non-UK Dom may well become “Mrs Deemed UK Dom” under the deemed domicile rules.

This will happen once Mrs Non-UK Dom has been resident in the UK for 17 out of the last 20 tax years.

Just as an aside, this deeming of domicility is something that needs to be watched extremely carefully for all UK resident non-domiciles. The problem arises if they have retained any non-UK situs assets.

On a particular day (the day when they fulfil the deemed domicile rules) their potential liability for IHT can rocket. It is recommended that anyone who advises non-UK domiciles holds a thorough review of the position and recommends the appropriate action when they are aware that the client is close in time to becoming a deemed UK domicile.

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