The Non-Domiciled Spouse Election

BLOG25th May 2015

The number of marriages between two people from different countries is ever growing. In an age of increasing globalisation, where the opportunities to live and work across the globe are opened up to us all, this is perhaps not surprising. However, what may come as a surprise to people in a country as diverse as the UK, is that those transnational couples living in the UK, where one spouse is non-UK domiciled, do not automatically benefit from the same Inheritance Tax (“IHT”) privileges as spouses who are both UK domiciled.

Transfers between UK domiciled spouses are exempt from IHT. This exemption was capped at £55,000 for transfers to a non-UK domiciled spouse until 6 April 2013 when it was increased to £325,000. Any transfers in excess of the capped amount are chargeable to IHT at 40%.

This cap can have a significant impact on transnational couples if the UK domiciled spouse is the first to pass away. An IHT liability, which would be avoided between two UK domiciled spouses, could be triggered. Meeting this liability could leave the surviving non-UK domiciled spouse in financial difficulties, and potentially having to sell the family home.

In an attempt to deal with this perceived discrimination, HM Revenue & Customs (“HMRC”) now allow a non-UK domiciled spouse to make an election, either during the lifetime of their UK domiciled spouse, or within two years following the UK domiciled spouse’s death, to be treated as UK domiciled for IHT purposes.

This option certainly opens up planning opportunities for transnational couples. For some, the security of knowing that their surviving spouse will not be faced with an unmanageable IHT liability when they pass away is of great importance to them and the non-UK domiciled spouse will wish to make the election. Careful consideration of the overall impact of making an election should however be given before any decisions are made.

Making an election will bring all of the non-UK domiciled spouse’s assets within the UK IHT regime. Where that spouse has assets of significant value in other countries, an election could produce a substantially higher IHT liability on their death than they were otherwise expecting.

Whether or not to make an election therefore depends on the individual circumstances of each couple and advice should be sought before any election is made to ensure that it does not produce unintended consequences. Once made, an election cannot be revoked.

If you would like any further information on the non-domiciled spouse election, please do not hesitate to contact our IHT, Trusts and Estates Team.

Alison Beattie Elizabeth Shaw Lisa Watson

Tax Senior Manager Tax Manager Tax Assistant Manager