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