In December 2012 I wrote an article about the potential inheritance tax issues facing British nationals with a foreign spouse. The article is here: British national with a foreign spouse? Good news! New legislation came into force in July of this year and I would like to clarify the changes for those affected.
UK inheritance tax (IHT) rules stated that 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.
All individuals, irrespective of their domicile status, benefit from a ‘nil rate band’ in respect of IHT, which is £325,000 in the current tax year. Transfer of assets between spouses, whether gifts made during a person’s lifetime or a transfer on the death of one party, are generally exempt from IHT, except where the spouse to whom assets are transferred is not UK domiciled. In this situation, the limit had been just £55,000, unchanged since 1982.
The Finance Bill 2103 confirms that with effect from 6th April 2013, the lifetime limit on the value of assets that can be transferred IHT free has been increased from the previous level of just £55,000, to the amount of the applicable nil-rate band, currently £325,000. When you consider that the tax rate is 40% on any transfers, any increase has to be a benefit.
To clarify, the situation now is that the nil rate band applies to any estate and then the Foreign Spouse Exemption is the same sum of £325,000 to any transfers to a non-domiciled spouse in excess of £650,000 wuld be subject to inheritance tax.
In addition, a new election regime has been included under which non UK domiciled spouses can elect to be treated as UK domiciled for IHT purposes. The means that the spouse would be entitled to the unlimited spouse exemption, but also means that any subsequent disposals in excess of the nil rate band would be liable to inheritance tax, regardless of where the asset is located. Clearly, this must be thought through and the consequences considered before taking action as it will not always be favourable to go down this route. It appears however, that this is only possible where the electing party is resident in the UK.
If this election is made, it will only affect an individual’s treatment for inheritance tax purposes and this must be made in writing to HMRC at any time after marriage or the registration of a civil partnership. Interestingly, an election can be made after death, provided this is within two years of the date of death. Elections will be irrevocable while the electing individual continues to remains resident in the UK, but will cease if they are resident outside the UK for more than four consecutive tax years.
In respect of life policies, and indeed certain investments, legitimate steps can be taken to that assets fall outside of your estate thus reducing potential IHT liabilities. This is sensible financial planning but is sadly often over-looked even though it is rarely complicated and often without any charge.
Please contact me if you require advice regarding your estate planning, UK tax issues or your financial planning in general. firstname.lastname@example.org