Married to or in a civil partnership with a non-UK national and wondered about the tax implications when you die?

Living in the UK you may have heard that there is a spousal exemption for inheritance tax which results in transfers (in life and at death) between spouses/civil partners being completely free from Inheritance Tax (IHT). You may be thinking that by leaving all your belongings to your spouse/civil partner, you avoid IHT being charged on the estate.

This would only be the case where both spouses/civil partners are UK-domiciled for tax reasons. However, different rules apply where one spouse/civil partner is non-UK domiciled e.g. an EU citizen who has married a UK citizen and come to live and work in the UK and is being treated as resident non-domiciled or where the spouse/civil partner is living abroad.

Until 5 April 2013 any estate passing to a non-UK domiciled spouse/civil partner would be subject to IHT for value above £55,000. Following criticism that the rules were discriminatory from an EU perspective the government proposed amendments to the rules and passed legislation resulting in an increase of the cap to the nil rate band (currently £325,000) with effect for transfers taking place on or after 6 April 2013. The amendments were introduced by the Finance Act 2013 with effect from 17 July 2013.

The rules include an option for the non-UK domiciled spouse/civil partner to elect to be treated as UK domiciled for IHT purposes. Such election does not affect the person’s income tax or capital gains tax position and provision for the election may be included in a person’s will.

Whether or not to make the election will depend on individual circumstances and will need careful consideration. It may e.g. be relevant to make the election if the estate of the UK domiciled spouse/civil partner is likely to exceed the value of the nil rate band.

For those whose worldwide assets are or may reach such value that the combined benefits of an increased IHT exempt limit and escaping a worldwide charge to IHT outweigh the advantage of unlimited IHT exempt transfers to a spouse or civil partner it may still be attractive to remain  non-UK domiciled for IHT purposes.

Taking professional advice on your individual circumstances at an early stage could alleviate stress of having to potentially make decisions on the tax position at a stage when you are dealing with the effects of death.

The material contained in this guide is provided for general purposes only and does not constitute legal or other professional advice. Appropriate legal advice should be sought for specific circumstances and before action is taken.

© , January 2014

Please contact:

Victoria Eccles, Solicitor

DD +44 (0) 20 7553 4075

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