It is not widely appreciated outside the professional sphere that when somebody dies and the whole of their estate passes to their spouse, it is not necessarily exempt from inheritance tax. If the deceased was UK domiciled but the surviving spouse is not, the unlimited spouse exemption does not apply. The exemption is limited to £55,000 (which is really neither here nor there) and this creates a serious anxiety for many married couples when they are told about it. The anxiety is even worse where the domicile position is uncertain because it seems to be impossible to obtain any certainty from HMRC on the matter.

In March, it was announced that the £55,000 limit would be increased to £325,000 and without wanting to look a gift horse in the mouth, in many cases this does not really solve the problem. There is going to be an opportunity for the non domiciled widow faced with a 40% tax charge on the whole of her husband’s worldwide estate to make an election to be treated as UK domiciled thereby securing the full spouse exemption. That sounds pretty good – except that it then brings the whole of her estate into charge to tax which makes it merely a deferral – and a rather expensive one, at that.

However, the draft Finance Bill recently published contains a most helpful relief for spouses in these circumstances. It would obviously be absurd for a non domiciled spouse to elect to be UK domiciled, secure the exemption and then elect back to being non domiciled. However, HMRC acknowledge the difficulty here so if a person who has made such an election is not resident for 3 successive tax years following the making of the election, the election will cease to have effect.

This right of election will only apply in respect of deaths on or after 6 April 2013 and naturally enough, the determination of the individual’s residence position will be made by reference to the statutory residence test which will be introduced on that date.

This is very helpful indeed and genuinely takes the sting from the unfairness and anxiety which many people feel about their inheritance tax position – although there must still be a serious question whether the discrimination against foreign domiciled spouses is compatible with the EC Treaty.