In addition to the new statutory residence tests, new rules are to apply in relation to non-domiciled spouses of UK domiciled spouses in relation to transfers for inheritance tax (IHT) purposes made on or after 6 April 2013.
As is relatively well known by anyone remotely involved with estate planning in the UK, IHT charges are based on domicile status. Individuals domiciled in the UK are liable to tax on their worldwide assets; individuals whose domicile lies outside the UK are only liable to IHT on assets situated in the UK.
Domicile is a common law concept and is not defined in statute for tax purposes. Broadly, it is where an individual has their permanent home or intends to settle permanently. The law ascribes a domicile to every person at birth, usually inherited from their father. Individuals who have lived, or come to live, in the UK for a number of years can retain non-UK domicile status if they can show that they do not intend to remain in the UK permanently or indefinitely.
Irrespective of their actual domicile, an individual whose domicile is other than in the UK is treated as being domiciled in the UK for IHT purposes if they are:
- UK-domiciled within the three years preceding a relevant transfer, or
- UK resident for 17 out of the 20 years of assessment ending with the year of assessment in which the relevant transfer occurs.
All individuals, irrespective of their domicile status, benefit from an IHT nil rate band, currently £325,000. This limit has been frozen until 2017/18 as confirmed in the recent Budget.
Transfers of assets between spouses and civil partners, whether gifts made during a person’s lifetime or transfers of assets occasioned by the death of one of the couple, are generally exempt from IHT and this means that for most married couples the liability to IHT is something to consider in relation to the death of the second of them to die; and then only if (usually) the estate of the survivor of them exceeds twice the nil rate band at the time of the survivor’s death.
However, where the spouse or civil partner to whom assets are transferred does not have UK domicile status there is a lifetime limit (‘cap’) on the value of assets that can be transferred free of IHT. This cap is intended to address the risk that, following a transfer between spouses or civil partners that would otherwise be exempt, where the recipient is domiciled outside the UK they could remove assets aboard and escape any IHT on their subsequent disposal.
The cap is currently £55,000 and has been fixed since 1982.
The changes due to come into effect from 6 April 2013 will reform the IHT treatment of transfers between UK-domiciled individuals and their non-UK domiciled spouse or civil partner in two ways:
- the cap will be increased to the level of the prevailing nil rate band at the time of the transfer, and
- under a new election regime, individuals domiciled other than in the UK and who are married or in a civil partnership will be able to elect to be treated as UK-domiciled for IHT purposes.
These changes, which I will look at in more detail next week, could have a significant effect on the IHT liabilities of married couples or those in a civil partnership where one of them is UK-domiciled and the other isn’t. At a relatively simple level, the raising of the exempt amount from £55,000 to £325,000 is clearly beneficial. As to whether to make the election, that will depend on the facts. Advice, incorporating some “scenario planning”, will therefore be absolutely essential.
Tony Wickenden is joint managing director at Technical Connection
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