On 11 December 2012 HM Treasury and HM Revenue & Customs (HMRC) published draft legislation for inclusion in the Finance Bill 2013 which affects the current restriction on the inheritance tax (IHT) exemption for transfers made by UK domiciled individuals to non-UK domiciled spouses or civil partners. The amendments follow criticism by the EU last October of the UK’s current position as discriminatory and a formal request for a review. Two main changes are accordingly proposed.
Firstly, the draft legislation intends to increase the amount which will be exempt from IHT. There is currently a limit of £55,000, which applies to the cumulative total of all transfers made by the same transferor to one or more spouses or civil partners during his/her lifetime and on death (section 18 Inheritance Tax Act 1984). This limit has been in place since 1982, but for transfers on or after 6 April 2013 the limit will now be the value of the prevailing IHT nil rate band (currently £325,000).
Secondly, the legislation will also allow non-UK domiciled spouses to elect to be treated as deemed domiciled in the UK for IHT purposes. The election must be made in writing to HMRC and can be made at any time after marrying or entering a civil partnership once the Finance Act 2013 has Royal Assent. Where an election is being made following a death, it must be made within two years of the death of the UK domiciled spouse. An election will be irrevocable whilst the electing individual is resident in the UK (residence to be determined in accordance with the new statutory residence rules also to be introduced in the Finance Bill 2013) and will cease to be effective if they are non-UK resident for more than three full consecutive tax years.
Once made, the election will mean the couple can benefit from the unlimited spouse exemption from IHT which applies to all other transfers of value between spouses during lifetime and on death. However, IHT will be due on the electing individual’s assets wherever in the world they are situated. For some people, avoiding this worldwide charge to IHT together with the benefit of the new combined increased IHT exempt limit will outweigh the advantage of the unlimited spouse exemption and will discourage them from making the election. Therefore whether 'to elect or not to elect' is a question clients will want to consider carefully and whatever the decision, but probably particularly if an election is made, it may be an appropriate time to consider if revisions are needed to their will.