UK IHT Rules and Possible changes

UK Inheritance Tax (IHT) is a function of domicile rather than residence.  One gets domicile from one’s father at birth and retains it through life.  It is possible to change domicile at birth but the requirements are complex, but not often achieved.  The IHT rules differentiate those spouses each of who have British domicile and those where one has British domicile and one is domiciled elsewhere.

Under the current rules, transfers during life or on death between those spouses sharing British domicile are tax free with the tax only being levied when assets are passed to third parties such as the children.  For those marriages with mixed domicile, the rules currently allow the British domiciled spouse to leave to the non-domicile spouse, GBP £55,000 tax exempt and up to GBP £325,000 nil rated.  Any excess wealth is taxable at 40%.

The European Commission has recently ruled that this differentiation is discriminatory and has threatened action through the European Court of Justice.

HMRC has proposed two solutions, though these are not yet enforced.  Firstly, they have suggested that they would increase the tax exempt level to GBP £325,000, which would then be now in addition to the nil rate band.  They have also proposed that they would allow the non-domicile spouse to elect to become UK domiciled and thence to enjoy the unlimited transfers currently available between spouses with the same UK domicile.  The downside of this election would mean that any assets owned by the electing spouse, which are currently free from inheritance tax would become taxable on the death of the electing spouse.  Those considering making an election if and when it becomes available or those who are concerned about their current exposure to this tax are invited to consult with us.  We believe we can assist people to significantly reduce their exposure and the cost of paying the tax.