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UK inheritance tax and domicile…how much is tax free?

This article sets out the allowances for UK inheritance tax on transfers between spouses or civil partners (as defined in the UK Civil Partnership Act 2004) where one or both are either UK domiciled or non-UK domiciled.
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A non-UK domiciled individual will only pay inheritance tax (IHT) on any UK situated assets.  On any other assets the country’s tax system where the assets are situated will apply and there may be tax to pay there.  However, once an individual becomes UK domiciled then they pay UK IHT on their worldwide assets.

When considering what IHT is due it is important to be aware of the allowances that are available in order to minimise the tax liability where possible.  Individuals have what is known as their nil rate band (NRB) allowance is £325,000 for the tax year 2012/2013.  In addition to this, between UK domiciled spouses or civil partners all transfers are tax free for IHT purposes, known as the inter spouse exemption.  However, this exemption is limited to £325,000 (for transfers after 6 April 2013) where the domicile of the first spouse or civil partner to die is the UK but the survivor is non-UK domiciled. 

The table below sets out the amount that can be transferred free from IHT between spouses or civil partners upon the first death.  Where couples are not married the table below does not apply.  The position between couples who are not married is that whatever the domicile of either party the amount that can be transferred upon the first death to the survivor is limited to the NRB.

.

Domicile of deceased

Domicile of survivor

NRB

Full spouse exemption

Limited spouse exemption (£325,000)

Total amount free from IHT upon 1st death

UK

UK

Yes

Yes

No

Total estate

UK

Non-UK

Yes

No

Yes*

£650,000*

Non-UK

UK

Yes

Yes

No

Total estate

Non-UK

Non-UK

Yes

Yes

No

Total estate

*Unless an election is made. Individuals who are domiciled outside the UK and who have a UK-domiciled spouse or civil partner can elect to be treated as domiciled in the UK for the purposes of IHT.

Where an election is made transfers from a UK-domiciled spouse or civil partner will be exempt from IHT but the electing individual’s worldwide estate will then be liable to UK IHT.

Where an election is not made, the non-domicile spousal exemption is £325,000, for transfers on or after 6 April 2013 as shown in the above table.  

Conclusion

Clearly the IHT position would be vastly effected if there was a high value transfer upon the first death of a UK domiciliary to a non-UK domiciliary rather than to a UK domiciliary.  It is therefore important to bear domicile in mind when considering IHT.  However, since domicile is not determined until death it may be wise to consider IHT planning to minimise the IHT if the position above may apply.

The information provided in this article is not intended to offer advice.
It is based on our interpretation of the relevant law and is correct at the date shown at the top of this article. While we believe this interpretation to be correct, we cannot guarantee it. We cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.
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