IHT spouse’s domicile election

Where one spouse or civil partner is UK domiciled for inheritance tax (IHT) purposes (UK-dom) and the other is not (UK non-dom), the IHT spouse exemption for transfers is capped instead of unlimited. To remove the cap the UK non-dom can elect to be treated as a UK-dom for IHT purposes.

Transfers for non-UK domiciled spouse

Usually, transfers of assets by one UK spouse or civil partner to the other are exempt from IHT. However, where there is a transfer from a UK-dom to a UK non-dom, the exemption is capped at £325,000, i.e. the same amount as the nil rate band. The cap applies to the total value of all transfers during each spouse/civil partner’s lifetime. If the limit is exceeded, IHT is payable on the excess.

Example

Kim (a UK-dom) is married to Jamal, whose domicile is the UAE. Kim dies suddenly in June 2022, leaving her estate of £1 million to Jamal in full. £325,000 is covered by the spouse exemption, and a further £325,000 is covered by her nil rate band (which is available in full). Assuming no IHT annual exemption is available, the remaining £350,000 will be liable to IHT at 40%.

Election

Since April 2013 it has been possible for a UK non-dom to make an irrevocable election to be treated as a UK-dom for IHT purposes. An election is effective from any specified date chosen by the elector. However, it can’t be backdated by more than seven years or to a date prior to 6 April 2013.

Conditions

To be able to make the election, one of two conditions must be met - depending on whether the election is being made during the lifetime of the UK domiciled spouse or after their death.

Condition A is that, at any time on or after 6 April 2013 and during the period of seven years ending with the date on which the election is made, the person had a spouse or civil partner who was domiciled in the UK.

Condition B is that a person (“the deceased”) dies and, at any time on or after 6 April 2013 and within the period of seven years ending with the date of death, the deceased was:

• domiciled in the UK; and
• the spouse or civil partner of the person who would, by virtue of the election, be treated as domiciled in the UK.

If the recipient spouse has died, their personal representatives can make an election if condition B is met.

Death elections

The election can be made during the lifetime of the UK-dom spouse and up to two years after their death (and backdated accordingly). This means that estate planning can be undertaken at a time when the surviving UK non-dom spouse has a better idea of their intentions for the future.

Effect

An election removes the restriction on the inter-spouse exemption and brings the couple into line with the treatment for UK-dom couples. As a cautionary note, this means any non-UK assets held by the non-dom will immediately be brought within the UK IHT net, and so a decision needs to be taken with great care.

Once an election is made the only way for its effect to be reversed is for the UK non-dom to leave the UK and be treated as non-UK resident for four successive tax years.

How do you make the claim?

While there is no standard claim form, you must notify HMRC in writing. A lifetime election can be made at any time during the UK-dom spouse’s lifetime but can only be backdated for up to seven years. An election following the death of a UK-dom spouse must be made within two years.

Note. If the UK non-dom spouse is caught by the deemed domicile provisions, an election will not be needed as they will benefit from the unrestricted spouse exemption in any case. With effect from 6 April 2017 a person is deemed to be domiciled in the UK for tax purposes where they have been resident here for 15 or more years out of the previous 20.