Posted by Nick Day on 05 Jul 2013

Inheritance Tax for Couples with “Mixed” Domiciles

If you are non-domiciled, your UK tax affairs can be complex from many perspectives.

One area where being non-domiciled could have been a distinct disadvantage in the past, was where a UK domiciled person gifted assets to their non-domiciled spouse/civil partner or left them assets on death.

UK Inheritance Tax (IHT) Rules

Up until 5 April 2013, the UK Inheritance Tax (IHT) rules were that a lifetime cap of £55,000 applied to the amount that could be transferred from a UK domiciled individual to their non-domiciled spouse/civil partner on an exempt basis.  This was a punitive provision given that UK domiciled spouses/civil partners could gift/leave as much as they wanted to each other without any IHT becoming payable.

From 6 April 2013 onwards, this £55,000 cap has been increased to the value of the IHT nil rate band, currently £325,000. This means that depending on circumstances, from 6 April 2013 onwards, a UK domiciled spouse/civil partner should be able to pass assets worth up to £650,000 to their non-domiciled other half i.e. by using the unused IHT nil rate band available to all individuals of £325,000, and the new lifetime cap for transfers to non-domiciled spouses/civil partners of £325,000.

Furthermore, from 6 April 2013 onwards, non-UK domiciled individuals can now elect to be treated as UK domiciled for UK Inheritance Tax (IHT) purposes, meaning that all asset transfers made to them from a UK domiciled spouse/civil partner will be free of IHT.  Before making a decision on the election the following points should be considered:

  1. A UK domiciled individual is liable to UK IHT on world-wide assets.
  2. A non-domiciled individual is liable to UK IHT on UK assets only.
  3. In UK tax law there is the concept of “deemed UK domicile”.  In other words, there are circumstances whereby even if you are technically non-domiciled based on your circumstances for UK income tax/capital gains tax, etc. purposes, you will be treated as UK domiciled for IHT purposes.  For example, if you have been UK tax resident in 17 out of the 20 tax years including the current tax year, you will be deemed UK-domiciled.

Increased Inheritance Tax

The increased IHT exempt limit for transfers from UK domiciled to non-domiciled spouses/civil partners could mean that it will not be necessary for non-UK domiciled individuals to consider making the election to be treated as UK domiciled, especially given that UK IHT would only be chargeable on UK assets and not global assets.

This is a major and welcome development, and a review is recommended for anyone potentially impacted by these provisions to determine the best course of action.  Much will depend on individual circumstances and future plans.

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See also…

Non-Domiciled Rebasing for Capital Tax Gains: April 2017

Non-Domiciled Status and UK Tax Planning

Non-domiciled status

UK Government consults on new UK Statutory Residence Test and reforms for non-domiciled individuals

£50,000 Non-Domicile Charge

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