Tax Video Update - IHT changes for non-domiciled spouses
09 September 2013 •
Warrener Stewart Tax Update
Inheritance Tax Changes for non-domiciled spouses, September 2013
What is the change?
The Finance Act 2013 includes the following changes:
1. An increase in the spousal exemption to the nil rate band in force at the time of the relevant transfer.
2. An election can now be made to allow non-domiciled spouses to be treated as UK domicile for inheritance tax purposes. This can be made either during their life time or on death.
Increase in spousal exemption
For deaths occurring before 6th April 2013, the exemption for transfers from a UK domiciled spouse and their non-domiciled spouse was limited to £55,000. Transfers above this life time limit were subject to an immediate charge to inheritance tax. This change will allow estates of up to £325,000 to be passed on death from a UK domiciled individual to his non-domiciled partner without suffering any charge to inheritance tax.
Election to be treated as UK domiciled for inheritance tax
Where an IHT liability would arise on death, the non-domiciled spouse should consider whether to make an election to be treated as UK domiciled. The election will allow a non-domiciled spouse to be treated as UK domiciled for inheritance tax purposes. The election does not affect the position for income tax or capital gains tax, so the individual may continue to claim the remittance basis in respect of foreign income and capital gains if they wish.
Conclusion
The obvious tax advantage of the making the election is not only will the couple be able to transfer assets freely during their life time but will also qualify for a further nil rate band. However, once the previously non-domiciled individual is treated as UK domiciled, their worldwide assets will be within the scope of IHT and not just UK situs assets. Although there are steps which could be taken to ensure the non-UK assets remain outside the scope of UK inheritance tax.
Conditions attached to both the life time election and the death election to ensure they are valid. Care needs to be taken when advising clients whether to make an election as it can have a significant effect on the amount of inheritance tax that becomes due, especially given that current rate of this tax is 40%.