I last covered this topic many years ago, so it is time for an update. If you are a Brit with a foreign husband or wife, or you are not British but are married to a Brit, this article is for you.
UK inheritance tax (IHT) rules state that transfers of assets between spouses or civil partners 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.
If your spouse is not British or UK domiciled you need to understand how the rules will affect you.
Bear in mind that most British expats will remain UK domiciled even if they are non-resident for tax purposes for many years. This means that they are subject to UK inheritance on global assets.
In the UK, 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, unchanged for some time. 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.
From 1982 to 2013, this was a paltry £55,000 but changed in 2013 to the level of the standard nil-rate band, being £325,000.
To clarify, the situation now is that the nil rate band applies to your worldwide estate. The Foreign Spouse Exemption in the same sum of £325,000 applies to any transfers to a non-domiciled spouse. There is also a Residence Nil Rate Band of £175,000 which can potentially be used.
This means that where a UK domiciled individual has a full nil-rate band available, they will be able to transfer an amount equal to double the nil-rate band – currently £650,000 -, plus the residicence nil-rate bank to their non-UK domiciled spouse free from IHT. A total of £825,000.
This is a fairly significant amount but for many will be far less than the value of total assets owned, especially when you factor in rises in property prices and investments.
What exactly is domicile?
Domicile is a complex legal concept, in basic terms, an individual acquires a domicile of origin at birth. This is the place of permanent residence, where there are substantial links and connections, and the nationality per a passport.
This is usually their father’s domicile and their country of nationality and/or birth. It is possible acquire a different domicile of choice if he or she later moves to another country with the intention of remaining there permanently or indefinitely.
The concept of domicile is strong in UK common law, but less so in many other countries. It is very different to residency, especially in legal and taxation terms.
Is there a way of reducing the potential tax liability?
There are various considerations and steps that can be taken.
- Life policies should be written into trust so that the proceeds are payable outside of the estate and not subject to UK inheritance tax. The proceeds on death can also be paid out quicker.
- Consideration should be given as to how property and assets are owned.
- The foreign spouse or civil partner may be able to become UK domiciled.
- Suitable wills should be arranged
From 2013, there has been the option for the non-UK domiciled spouses to 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 given proper consideration 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.
The 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.
Given the demographic of the UAE and wider GCC, this is a topic that is relevant for many people but it seems to be largely unknown.
Factoring in potential restrictions in passing on assets is sensible financial planning but is sadly often over-looked even though some steps are not overly complicated.
To arrange a discussion about estate planning, wills, or on any aspect of your personal financial planning, please email me at email@example.com I run my own set-up under the Holborn Assets umbrella.
I write articles such as this one as part of the holistic personal financial planning service and that I provide to expats, and the general consumer, financial and legal information that I provide in The National newspaper, on radio, and in the Facebook group British Expats Dubai.
Please take a look at the other useful articles on this website.
The right advice for nice people
Note that in this article the term spouse also refers to a civil partner in UK law.