The implications of gifting assets to a foreign spouse

17 Jul The implications of gifting assets to a foreign spouse

This Spring brought a welcome change to the inheritance tax (IHT) regime for foreign domiciled individuals living in the UK and married to a UK-domiciled spouse. A regime which had been in place since 1982.

Prior to April 2013, a non-UK domiciled spouse (inc civil partners) could only receive an IHT-free amount limited to the incumbent nil-rate band (available to any beneficiary) plus an additional £55,000 – in any 7-year period during the lifetime of their UK-domiciled spouse making the gift, or via their Will after death – a total of £380k at current rates.

Anything above this £380k, gifted in a 7 year period during their UK-domiciled spouse’s lifetime, would incur an immediate charge to ‘lifetime’ IHT of 20%, or after death, a charge to IHT of 40%.

This IHT-free limit was brought in to limit the potential tax losses to the UK government. They realised that if a foreign domiciled spouse  inherited the UK estate of a UK-domiciled spouse, then sold up and returned to their homeland, the UK government would lose out on the potential for charging IHT on their death.

The ‘additional £55k’ limit has now been increased, and will continue to increase in line with the incumbent nil-rate band – currently £325k. So under this regime, the total a non-UK domiciled spouse can receive IHT-free now, is double the nil-rate band – currently £650k.

In addition, where this double nil-rate band limit is deemed insufficient by the non-UK domiciled spouse, they now have the ability to elect – either during the lifetime of their UK-domiciled spouse or within 2 years of their death – to become UK-domiciled for tax purposes.  In this way they can claim the spousal-exemption in full, so that any amount they receive or inherit is tax-free.

However, the trade off is that this election will bring all their worldwide assets within the scope of UK IHT, where without the election any assets they owned outside the UK would be exempt. So, the implications of such an election must be considered carefully, to ensure a short-term benefit is not outweighed by the long-term consequences.

To limit the risk of non-UK domiciled spouses doing what UK politicians do regarding ‘principal private residence’ elections to avoid CGT(!!), the Government has imposed a condition that the election will remain in force should the foreign spouse leave the UK permanently, for 4 years after their departure.