Finance Act 2013 brought in two significant changes as far as non-UK domiciled individuals and inheritance tax (IHT) are concerned.

These changes have arisen mainly out of issues relating to the spouse exemption (for ease of reference, we refer to 'spouse' to cover spouses and civil partners). Where a transfer is made from a UK domiciled spouse to a non-UK domiciled spouse, the exemption has, for the last 30 years or so, been capped at £55,000. In other scenarios the spouse exemption is unlimited.

This means that transfers from a UK domiciled spouse to a non-UK domiciled spouse (on death for example) could result in an IHT charge, whereas in other circumstances, there would be no charge.

The first helpful change was to increase the level of the cap from £55,000 to the level of the prevailing nil rate band (currently £325,000). For some, this increase in spouse exemption combined with the availability of their nil rate band (a further £325,000) may be sufficient to ensure IHT-efficient passage of value. For others, however, the increase may be insufficient and the second change might, therefore, be of interest.

This enables non-UK domiciled individuals who are/were married to a UK domiciled person to elect to be treated as UK domiciled for IHT purposes. This election can only apply in respect of transfers on or after 6 April 2013. The benefit of the election is that the non-UK domiciled recipient would benefit from an uncapped spouse exemption.

The downside is that it could potentially increase future IHT charges. This is because non-UK assets held by non-UK domiciled individuals are excluded from the scope of IHT. The election would bring those assets back into scope to charge.

The election is irrevocable so individuals should take advice prior to making it, both to determine whether the benefits outweigh the downsides and to review the current estates. Also, the election would not be required if the non-UK domiciled spouse is already deemed domiciled for IHT purposes by virtue of being UK resident in 17 out of the last 20 tax years. It should be noted that the election applies for IHT purposes only and the individuals would retain non-UK domicile status for income tax and capital gains tax purposes.

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