New rules
Conditions for election


In the United Kingdom, inheritance tax is levied on the basis of an individual's domicile status. While transfers between spouses have been exempt from inheritance tax since the 1970s, in 1982 a limit was introduced on the amount that a UK domiciled spouse could transfer to a non-UK domiciled spouse without inheritance tax being payable. This limit was set at £55,000 – the nil rate band at the time – and has remained in place until this year, with no change to reflect the increase in the nil rate band since 1982.

As a result of a European Commission request that the United Kingdom formally review the spouse exemption on the basis that the difference in tax treatment of domiciled and non-domiciled spouses was discriminatory, the Finance Act 2013, which received royal assent on July 17 2013, has introduced new rules for non-UK domiciled spouses.

For the purposes of this update, 'spouse' should be read to include civil partners.

New rules

The changes to the treatment of the non-UK domiciled spouse (which came into effect on April 6 2013) are twofold:

  • The exemption limit for transfers from UK to non-UK domiciled spouses for inheritance tax purposes will be linked to the relevant nil rate band in place at the time; and
  • A non-UK domiciled spouse can elect to be treated as UK domiciled for inheritance tax purposes in order to benefit from an unrestricted spouse exemption if certain conditions are met.

While both changes are welcome, the second is the more significant of the two.

Conditions for an election

In order for an election to be made for a non-UK domiciled individual to be treated as being UK domiciled for inheritance tax purposes, either during the lifetime or on the death of his or her UK domiciled spouse, one of the following conditions must be satisfied:

  • The lifetime election – at any time on or after April 6 2013 and during the seven-year period ending with the date of the election, the relevant non-UK domiciled spouse must have had a spouse who was UK domiciled.
  • The death election – the spouse of the individual for whom the election is being made dies having been UK domiciled at any time on or after April 6 2013 and within the previous seven years ending with the date of death.

There is no requirement for the electing spouse to be a UK resident at the time of making the election.


The election is for inheritance tax purposes only – it does not affect where a person is domiciled as a matter of general law. Nor would it affect the income tax or capital gains tax position of an individual who is taxed on the remittance basis. It also does not affect and is not affected by an individual's 'deemed domicile' status, whereby an individual is treated as domiciled in the United Kingdom for inheritance tax as a result of having been UK resident in 17 of the past 20 tax years.

Both types of election (lifetime and death) are irrevocable and must be made by notice in writing to Her Majesty's Revenue and Customs (HMRC). A death election must be made within two years of the death (although HMRC has discretion to extend this period).

Both elections take effect as of a date specified in the notice to HMRC. Such date must be on or after April 6 2013 and be within seven years of the date when the election is made for a lifetime election, and within seven years of the date of death in the case of a death election. As such, any election can be dated so that it takes effect retrospectively and, in the case of a death, the effective date can be written back to a date before the death (assuming that the death is on or after April 6 2013), which may be useful. The added significance of the seven-year period is that 'potentially exempt transfers' (ie, gifts or other chargeable transfers that are not covered by an exemption and which would fall out of the inheritance tax charge and become fully exempt only if the donor survives for seven years from the date of the gift or transfer) could be covered if required.


Once the election is made, the non-domiciled spouse will able to benefit from the full unlimited spousal exemption, meaning that no inheritance tax will be payable on lifetime transfers between spouses or on the value of the estate passing to the surviving spouse at death. Without the benefit of the full spouse exemption, any value over the above-mentioned limit on transfers to a non-UK domiciled spouse (plus any nil rate band, to the extent that this is still intact) would be subject to inheritance tax at a rate of 20% on lifetime transfers between the spouses and 40% on the death of the UK domiciled spouse.

However, the other side of the coin is that the worldwide estate of the non-domiciled spouse will be brought within the UK inheritance tax net indefinitely (unless he or she is non-resident for a period of four successive years after making the election). This means that inheritance tax would be payable on the value of the worldwide estate above the nil rate band on death, and potentially also on any gifts or transfers made after the date of the election.

Although the election is irrevocable, if the person making the election is not a UK resident for a period of four successive tax years after making it, the election will cease to have effect at the end of that four-year period. This makes the election a potentially useful planning tool for any non-UK domiciled and non-UK resident surviving spouse, particularly if he or she is relatively young and is likely to survive the four-year period following the election.

Furthermore, the non-UK domiciled surviving spouse should also be able to continue benefitting from any applicable double taxation relief to the extent that this applies, as the election should not affect this. Therefore, in appropriate circumstances, the fact that the worldwide estate would fall within the UK inheritance tax net for four years may be a small price to pay for a potentially significant tax saving.

Individuals should take care when considering whether to make an election as it will not be appropriate in all circumstances, and much will depend on the position of the individual in question.

For further information on this topic please contact Joanna Muirhead at Lawrence Graham LLP by telephone (+44 20 7379 0000), fax (+44 20 7379 6854) or email ([email protected]).