A non-domiciled spouse (or civil partner) can elect to be treated as UK domiciled for inheritance tax (IHT) purposes, so that the full spousal exemption applies to gifts or inheritances received from their UK domiciled spouse or civil partner.
This election only needs to be considered where a UK domiciled (or deemed domiciled) individual has a spouse or civil partner who is not domiciled (or deemed domiciled) in the UK. For 2016-17 and earlier years, an individual will have a deemed domicile for IHT purposes if they have been UK resident for any part of 17 of the last 20 tax years ending with the tax year in question, or they were UK domiciled at any point in the last three years.
From 6 April 2017, an individual will be deemed domiciled where either:
- They have been UK resident for 15 of the preceding 20 years; or
- They were born in the UK with a UK domicile of origin which they have since lost, and are UK resident for both the year in question and at least one of the two preceding years.
The effect of the election is to exempt from IHT all gifts and bequests from the UK domiciled spouse or civil partner to the non-domiciled spouse/civil partner. This could result in significant IHT savings.
However, consideration needs to be given to the full tax implications of making the election, which is irrevocable if the individual remains UK resident.
It is important to note that the election only has effect for IHT purposes; it does not affect an individual’s domicile status for income tax or capital gains tax purposes.
This factsheet explores the tax implications of making the election. All further references to a spouse include a civil partner, and to domicile include deemed domicile under the provisions outlined above.
Overview
Domicile is a common law concept and should not be confused with the residence of an individual. At birth, an individual will acquire the domicile that of their father however an individual’s domicile can change over the course of their lifetime. For example, it is possible for an individual to choose to establish a new domicile in another country by residing in the chosen country and intending to remain there permanently and indefinitely. It should be noted that an individual can only have one country of domicile at any point in time. However it is possible for the same individual to be resident in more than one country in the same tax year. The concept of domicile is important in relation to IHT as it impacts which assets are within the scope of UK IHT.
A UK domiciled individual is chargeable to IHT on worldwide assets, whereas an individual who is not UK domiciled is chargeable to IHT only in relation to UK-situated assets. Specific rules apply to determine the location of an asset for IHT purposes, but these are outside the scope of this factsheet.
As a general rule, transfers between spouses (whether made during lifetime or on death) are exempt from IHT. However, a limited spouse exemption of £325,000 applies in relation to transfers from a UK domiciled individual to a non-domiciled spouse. This limit was £55,000 prior to 6 April 2013.
Since 6 April 2013, it has been possible for a spouse who is domiciled outside the UK to make an election to be treated as domiciled in the UK for IHT purposes, so enabling them to benefit from an unlimited IHT spousal exemption in respect of gifts and bequests received from the UK-domiciled spouse.
A disadvantage of making the election in that from the date it takes effect the worldwide assets of the elector will be subject to IHT, rather than just those situated in the UK. In addition, if they receive gifts or inheritances of non-UK assets in the future (for example, from relatives living overseas) these assets will also become liable to IHT.
When an election can be made
An election may be made by a non-UK domiciled individual either during the lifetime of their UK domiciled spouse or following the latter’s death, as long as the spouse was domiciled in the UK for the seven years ending with the date of death. Generally, elections must be made within two years post death, although HM Revenue & Customs (HMRC) has discretion to extend this period.
This allows for a two-year window following the death of the UK domiciled spouse in which the election is still possible and gives time to assess whether or not it will be advantageous.
Should an election be made?
The decision to make an election and the date from which it is to take effect requires careful consideration and the following factors will need to be taken into account:
- The size of the individuals’ respective estates.
- The value of the non-domiciled spouse’s overseas assets and the possibility of them receiving future inheritances or gifts from outside the UK.
- The availability of any IHT reliefs and or exemptions, such as Business Property Relief and Agricultural Property Relief, relief for charitable gifts, and conditional exemption on heritage property.
- Whether the non-domiciled spouse has received any gifts from their spouse within the last seven years.
- The long-term plans of the couple in relation to their residence status.
- Whether there are reliefs available under a double tax treaty concluded with the home country of the non-domiciled spouse.
It may be possible to undertake IHT planning before the election becomes effective, in order to protect the overseas assets of the non-domiciled spouse from IHT. This is a complex area and further advice should be sought.
When the election takes effect
When an election is made, the person making the election will be treated as domiciled in the UK from the date stated in the notice of election submitted to HMRC. This date must be:
- 6 April 2013 or later; and
- Within the seven-year period ending with the date the election is made for a lifetime election, or within the seven-year period ending on the date of the UK domiciled spouse’s death for a death election.
The election will apply to all transfers made after the effective date of the election, provided the couple were married or in civil partnership at that date.
It is therefore possible for the election to be backdated (although not before 6 April 2013) so that gifts made within the previous seven years can be exempt from IHT. However, care needs to be taken when backdating an election, in order to avoid the situation where a transfer made by the elector that did not give rise to an IHT charge at the time it was made proves to be chargeable as a result of the election. This could happen, for example, where a previous transfer has been made by the elector into an offshore trust and the value of the transfer is above the available nil rate band.
When the election ceases to take effect
An election is irrevocable so long as the elector remains UK resident for tax purposes.
An election will automatically cease to have effect if the elector is non-UK resident for four successive tax years, beginning at any time after the election has been made. No action needs to be taken on the part of the elector. The election simply falls away after the end of the fourth year of non-residence. From this date, the individual’s non-UK assets will once again fall outside the scope of IHT.
This rule is particularly beneficial for mixed domicile couples who are resident outside the UK, or where the non-domiciled individual is likely to return to their home country following the death of their spouse. If, for example, the elector remains non-UK resident for four years following the death of their spouse, their non-UK domicile status automatically reverts and only their UK assets will be within the scope of IHT going forward.
Whilst there is a risk that the surviving spouse may pass away within the four-year period, it may be possible to take out insurance to cover this.
There is nothing to prevent the individual from re-electing to be treated as UK domiciled after this period, should this be beneficial.
Avoiding the problem areas
Once an election has been made, the non-domiciled spouse should avoid making transfers that would be chargeable to IHT. This would include, for example, transferring assets to a trust or certain transfers of value to or from a close company. It may be possible to undertake planning in advance of the election to mitigate IHT on the non-domiciled spouse’s overseas assets, for which specialist advice should be sought.
Care needs to be taken in relation to any gifts received by the elector from their UK domiciled spouse before 6 April 2013, since the former £55,000 limit will still apply if those gifts become chargeable as a result of the donor’s death within seven years of making the gift.
Summary
The election to be treated as UK domiciled for IHT purposes is a valuable tool which can be used by a non-UK domiciled individual to benefit from the full spousal exemption in respect of gifts received from a UK domiciled spouse.
Advice should be sought when considering whether or not to make the election, in order to ensure that it does not result in adverse IHT consequences. We can advise on whether or not an election will be beneficial in your particular circumstances and, if so, the optimum time to make it.
We can also assist with preparing and filing the election with HMRC.
This factsheet is based on law and HMRC practice at 1 May 2021.
