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Non-UK domiciled spouses and spouse

Posted by: admin    Tags:      Posted date:  May 15, 2013

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On death property passing from husband to wife was free of inheritance tax provided that they were either both domiciled in the UK or both domiciled outside the UK. The spouse exemption where the deceased is UK-domiciled but the surviving spouse is not
was restricted to £55,000 until recently.

Since 6^th April 2013 that limit has been revised to equal the Nil Rate Band for inheritance tax (currently £325,000) (“NRB”) and
will increase in line with it in the future.

Another change is that non-domiciled individuals whose spouse is UK-domiciled are able to elect to be treated, for inheritance tax
purposes only, as UK-domiciled. If they do so elect they will not be subject to any limit on exempt transfers. This election will not be revocable (ie. you cannot change your mind once you have made it) BUT it will lapse automatically if the non-domiciled spouse becomes non-resident for three years.

Examples:

(i)
Wealthy husband dies domiciled in England. His non-domiciled wife makes no election and thus his taxable estate is reduced by the NRB and the spouse exemption but still leaves a taxable estate.

(ii)
Wealthy husband dies domiciled in England. His non-domiciled wife makes an election to be treated as UK-domiciled and thus his entire estate passes to her tax-free. If she then moves abroad and stays there for 3 years her deemed UK domicile is lost and there is no clawback of any inheritance tax already saved. On her death she will only be liable to UK inheritance tax on any assets that she holds in the UK.

The concepts of domicile and residence are complex and we suggest you contact us for specialist advice in these areas in which we have expertise.