Although there have been whispers about this for some time, it now appears that the UK Government really is planning to relax the inheritance tax rules relating to British nationals with a foreign spouse.
The current situation is that under UK inheritance tax (IHT) rules transfers of assets between spouses are usually free from tax at all times and also at death, but only if both parties are UK domiciled, a legal concept separate to residency. In most cases a person needs to have been born in the UK, or for their father to have been, to be UK domiciled.
Under existing legislation all transfers between spouses or civil partners are exempt from Inheritance Tax (IHT), only if they are both domiciled in the UK, even if they are not living together. A problem arises if the spouse who is receiving the ‘gift’ is not UK domiciled (or ‘deemed’ domiciled), in which case the exemption only applies to the first £55,000 of assets transferred (on a cumulative basis). This limit has not changed since 1982 when it was first introduced, but it is proposed that this is increased to £325,000.
HMRC (Her Majesty’s Revenue & Customs) has also proposed a new ‘election regime’ under which a spouse with a UK domiciled partner who is not domiciled in the UK can elect to be treated as UK domiciled for IHT purposes. This means the partner would be entitled to the unlimited spouse exemption. If approved, the new rules would be enacted within the Finance Act 2013.
In an increasingly mobile world more people than ever have spouses of a different nationality and these proposed changes would certainly make their situation a little fairer.
More information will become available over the next few months, but please do not hesitate to contact me if you have any queries or require advice on your own estate planning.