Let's Talk Tax - October 2013 - Big IHT changes benefit non-dom spouses

Let’s talk tax- big IHT changes benefit non-dom spouses

Most married couples enjoy the benefit of freedomto pass assets either way between them but there is one small group who do notbenefit from the ‘spouse exemption’ which also applies to civil partnerships.

The total amount that a UK-domiciliary can give andbequeath to their non-domiciled spouse or civil partner, exempt from IHT, islimited to a fixed amount. That fixed amount has just been increased from£55,000 to be equal to  the IHT nil-rateband (currently £325,000). That is pretty welcome and can free transfers of upto £650,000 from tax when the exemption and the NRB are added together.

 A tax one-way street

The Government doesn’t like UK-domiciliaries ‘escaping’IHT by giving all their wealth to non-dom spouses to salt it all away offshoreand avoid IHT altogether but they don’t mind non-doms giving all of theirwealth to a UK-domiciled spouse, making their entire joint fortune, foreignassets and all, liable for IHT.

 Non-doms may now elect for UK domicile forIHT purposes

Why would they do that? If the couple are fairlysure that the UK-domiciliary is likely to die first, their widow(er) couldreceive their entire estate IHT-free: giving the surviving spouse an increaseof up to 40% in their disposable capital is a great benefit, especially if theyare then able to make further gifts or dispositions that mitigate the IHT billfurther.

The election doesn’t even have to be made while thenon-dom is alive: executors can make a retrospective claim for a deceasedperson to be deemed UK-domiciled.

Eventually it will be possible to backdateelections up to seven years but there is a cut-off start date; the new ruleonly applies to people who had not died before 6 April 2013.

It’s an election ‘for life’ but . . .

Although the election means that the non-dom willbe treated as UK-domiciled from the date chosen, they will automatically ceaseto be deemed to be UK-domiciled if they become non-resident and remainnon-UK-resident for at least four tax years.

These new rules fundamentally alter the way thatmany couples can approach estate planning and in many cases existing willsshould be reviewed and may need to be rewritten but it’s not simply a case ofmaking the election. The non-dom may want to make gifts, perhaps into trust,before making the election to maximise the benefit of their non-domiciledstatus.

Above all what is needed is an understanding butobjective appraisal of the couple’s circumstances to enable them to make thedispositions they wish without incurring tax unnecessarily.