Election by non-UK domiciled spouse to be treated as UK domiciled for inheritance tax purposes

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Summary: Non-UK domiciled individuals will be able to elect to be treated as domiciled in the UK for inheritance tax (‘IHT’) purposes under provisions contained in the draft Finance Bill 2013, published in December 2012. Where an election is made, gifts made by a UK domiciled spouse to his non-UK domiciled spouse will be free from UK IHT.Changes to the measure announced at the time of the 2013 Budget mean that lifetime gifts made within the seven years before death will now also be able to benefit from the full spouse exemption even if no election was in place at the time of the gifts.

You should read this if you, or any of your clients, are non-UK domiciled and have a UK domiciled spouse/civil partner.

Background

Transfers of assets between spouses and civil partners are fully exempt from UK IHT except where the transfer is from a UK domiciled (or deemed domiciled) spouse to a non-UK domiciled (and not deemed domiciled) spouse. In such cases the exemption is currently capped at £55,000.

Original Finance Bill 2013 proposals

The draft Finance Bill 2013 published in December 2012 contained measures:

  • to increase the £55,000 limit to the level of the nil rate band (currently £325,000 and frozen at that level until 2018/2019). This new limit will apply to transfers on or after 6 April 2013; and
  • to allow non-UK domiciled individuals to elect to be treated as domiciled in the UK for IHT purposes.

Election to be treated as UK domiciled

A non-UK domiciled individual who makes an election will be able to receive assets from their UK domiciled spouse free of UK IHT.

However, as a consequence, the non-UK domiciled spouse’s worldwide assets will be brought within the UK IHT net, until the election ceases to have effect.

Where no election is made only the UK assets of the non-UK domiciled spouse will be subject to UK IHT.

Changes to proposals

Changes to the proposals were announced at the time of Budget 2013. Under the amended proposals, an individual making a lifetime election or a death election can choose for the election to apply from any date within the seven years before the election is made. This means that any lifetime gifts made within that period can benefit from the full spouse exemption even though no election was in place at the time the gifts were made. The earliest date from which an individual can choose the election to take effect is 6 April 2013.

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