Inheritance Tax exemptions for non-domiciled spouses or civil partners

For inheritance tax, one of the most valuable exemptions available is the spouse or civil partnership exemption. Provided both spouses’ long term residence status (previously domicile status) is the same, the amount of the spouse exemption is generally unlimited. The unlimited exemption also applies to lifetime gifting between spouses.

However, in cases where the deceased is considered a long term resident in the UK but their spouse is not, the amount of spouse or civil partnership exemption is limited to £325,000 (up from the previously much lower limit of £55,000).  This additional capped spouse exemption links to the amount of the nil rate band and will change as the nil rate band changes.

This capped exemption is unusual as it is a lifetime limit. It does not refresh after seven years (as with the general nil rate band) and any gifting to a non-domiciled spouse in the deceased’s lifetime will use up part of, and potentially all, of the exemption. The spouse exemption is always used first and once it has been used in its entirety, any further gifts are treated as a potentially exempt transfer. You cannot change the order of this application.

To re-iterate this additional spouse allowance is in addition to the general nil rate band of £325,000.

Making an election to be treated as a long term resident for inheritance tax purposes

In circumstances such as this, one option to consider is for the non-long term resident spouse to consider making an election to be treated as long term resident for inheritance tax purposes. This would align the long term resident position between the two spouses and the estate would then benefit from the unlimited spouse exemption. However, with this comes a risk as the electing spouse will then bring their own worldwide estate into the scope of UK inheritance tax for 10 years (and potentially longer).

There are options for making a lifetime election, a death election or, if the circumstances prevail, a death election by personal representatives. Deciding whether to make an election should always be carefully considered on a case-by-case basis with the advantages and disadvantages being fully considered. In particular the electing spouse’s future plans should be considered as this can have a significant impact on the decision.

We often provide advice to individuals considering making an election. We recently (before the introduction of the new long term resident provisions in April) acted in relation to an estate of this nature – specifically the deceased being UK domiciled but the surviving spouse being Swedish domiciled. The whole estate was passing to the surviving spouse but far exceeded the £650,000 of available limits. This resulted in the estate becoming exposed to inheritance tax and the spouse needing to find available assets to settle the inheritance tax bill. The non-domiciled spouse chose in this case to make an election to be treated as UK domiciled for inheritance tax purposes allowing for the estate to benefit from the unlimited spouse exemption. After fully considering the facts, the benefit of making an election outweighed the risk to this particular client.

Residence and double tax conventions

Similarly, we recently acted for another estate whereby the deceased was UK domiciled (again before the introduction of the new rules) and leaving his worldwide estate, well in excess of £1m, to his South African domiciled spouse. Whilst initially approached for election advice, in this case and bearing in mind the provisions of the double tax convention between the UK and the Republic of South Africa, the inheritance tax liability could be mitigated without the need for making an election clearly highlighting why it is important to take specific advice on a case-by-case basis. You can read more about how we helped here.

If you have any questions about inheritance tax, domicile and long term residency, our expert team can help.