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Inheritance Tax – Non Domicile Spouse Update

From the 6 April 2013, new legislation will take effect which will change the inheritance tax treatment of transfers between UK-domiciled individuals and their non-UK domiciled spouse or civil partners.
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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. Individuals domiciled in the UK are liable to tax on their worldwide assets; individuals whose domicile lies outside the UK are only liable to Inheritance Tax (IHT) on assets situated in the UK.

All individuals, irrespective of their domicile status, benefit from an IHT nil-rate band, currently £325,000. Transfers of assets between spouses and between 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 except where the spouse or civil partner of, to whom the assets are transferred, is not a UK domicile. However, where the transfer was made to a non-domicile spouse or civil partner this was limited to £55,000.

The Finance Bill 2013 confirms that from 6 April 2013, the lifetime limit on the value of the assets that can be transferred IHT free will be increased from £55,000 to the applicable nil-rate band, currently £325,000.

A new election regime has also been included, under which non UK domiciled spouses or civil partners whose spouse or civil partner is UK domiciled can elect to be treated as UK domiciled for IHT purposes. This means the partner would be entitled to the unlimited spouse exemption but subsequent non-exempt disposals by them which are in excess of the nil rate band will be liable to inheritance tax, regardless of where the assets are located.

Making an election

The election will only affect an individual's treatment for IHT purposes. The election will need to be made in writing to HM Revenue & Customs (HMRC) and may be made at any time after marriage or registration of the civil partnership. Elections that follow a death will only be valid if they are made within two years of the death or such longer period as an officer of Revenue and Customs may in the particular case allow; and only where death occurs on or after 6 April 2013. The personal representatives of non-domiciled individuals will be able to make a death election on their behalf.

Electing spouses making a lifetime election will be able to choose a date the election applies from, the earliest date that can be specified is 6 April 2013.  Where no date is specified the lifetime election will take effect on the date it is made. A death election is treated as taking effect on the date of death of the spouse or civil partner.

Elections will be irrevocable while the electing individual continues to remain resident in the UK. An election will cease to have effect if the electing person is resident outside the UK for more than four consecutive tax years.

The legislation will come into effect when the Finance Bill 2013 receives Royal Asset.

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