The spouse exemption is arguably the most important inheritance tax (IHT) relief, as it ensures that no IHT is payable on any gift made between husbands and wives or civil partners during their lifetime or on death.

However, the spouse exemption is currently limited to just £55,000 if property is transferred (whether during lifetime or on death) by aUKdomiciled person to his or her non-UK domiciled spouse.

The exempt amount has not changed for many years and the EU has questioned the validity of discriminating against non-UK spouses in this way. As a result the exemption is due to rise to £325,000 from 6 April 2013. Whilst this is welcome, it is still falls some way short of the unlimited exemption available to couples with the same domicile or indeed couples where only the deceased (or transferor) spouse is non-domiciled.

Therefore, as an alternative, a non-domiciled spouse will be able to elect to beUKdomiciled for IHT purposes after 6 April 2013. The spouse exemption will then be unlimited. It will also be possible for the non-domiciled spouse to make a post-death election within 2 years after the death of theirUKdomiciled partner, back-dated to the date of death. A potential downside is that the non-domiciled spouse's worldwide property would also then be in the UK IHT net.  However the election will cease to have effect if the electing spouse is non-resident for 3 full consecutive years. 

The ability to elect to be UK domiciled for IHT purposes will need to be properly considered but may prove a valuable concession for couples who only or mainly have UK property.

This first appeared in our International Newsletter in March 2013.