The terms of the inheritance tax spouse exemption are well known – that when one spouse dies, any assets passing to the other spouse are completely exempt from inheritance tax.
There is an exception to this rule under Section 18 Inheritance Tax Act 1984 where the transferor spouse is UK domiciled and the transferee spouse is not. In that case, the exemption is only £55,000 which is really neither here nor there. This can come as a shock (and indeed can cause considerable alarm) where somebody has gone to live abroad, married a foreign spouse but then finds HMRC unwilling to accept that they have acquired a foreign domicile, thereby depriving them of the spouse exemption and creating a (possibly enormous) unexpected liability to inheritance tax on the first death.
These are obviously circumstances where action needs to be taken to avoid some rather unpleasant consequences. Who would want to leave their surviving spouse with a problem like this?
However, I have been reading an excellent article by a Mr Anderson and a Mr Perry who argue that this restriction might also be struck down by the European Court on grounds of discrimination. This is not quite so clear because it is not a discrimination based on residence but on domicile which does not feature in the European tax codes in quite the same way. EU countries tend to use the term domicile as synonymous with residence or ordinary residence.
It is also not very easy to regard this restriction as being relevant to the freedom of establishment or the free movement of capital because UK inheritance tax is charged on a worldwide basis on those domiciled in the UK. However, the recent case of Veramattner (C-510/08) provides some real hope in this connection. This was a case about German gift tax which decided that the domestic law of a Member State should not operate to provide a different allowance to persons who are non-resident from that which would apply if they were resident.
It is by no means certain that arguments on these lines would be successful, but it is a very interesting line of argument should the occasion arise.