While all UK domiciled people are entitled to the full tax free band, if your spouse or civil partner is domiciled outside of the UK, then the UK government only allows an exemption of UK inheritance tax on a band of up to £55,000.
For this lower figure to be effective, the transferor is domiciled in the UK or treated as such under the wonderfully titled IHTA84/S267 and the transferor’s spouse or civil partner is neither domiciled not treated as such in the UK; both statements must be accurate immediately before the transfer from the deceased to the spouse/civil partner.
If the transferor is domiciled outside of the UK and the spouse/civil partner is domiciled in the UK, no allowance will be given on that first transfer.
If the £55,000 limit is exceeded, you can allocate the exemption in the manner which is most favourable to the spouse/civil partner.
Here’s two examples from the government’s taxation website: it’s repeated here for ease of accuracy
Example 1
In 1998, Mr A, who was domiciled in the UK transferred £200,000 to Mrs A, who was not domiciled in the UK. Of this transfer, £55,000 is exempt under IHTA1984/S18(2), and £145,000 is a PET and assumed to be exempt. Mr A dies in 2007 and leaves all his property to Mrs A, who remains domiciled outside the UK. Even though Mr A has survived for 7 years after making the transfer, the limited exemption under IHTA1984/S18(2) has all been used and is not available on Mr A’s death.
Example 2
In 1998 Mr A transfers a UK property worth £500,000 to Mrs A. Both are domiciled outside the UK. Exemption under IHTA1984/S18(1) is available in full. In 2006 Mr A is deemed to be domiciled in the UK and a year later gives £100,000 to Mrs A who remains domiciled outside the UK. The limited exemption under IHTA1984/S18(2) is not then available because the amount of exemption already conferred under IHTA1984/S18 as a whole exceeds £55,000.
Further detailed information is available here:
http://www.hmrc.gov.uk/manuals/IHTmanual/IHTM11033.htm
Here’s the final easy version:
If domicile of 1st to die is Non-UK and survivor is UK domicile – there is a full spousal exemption.
If domicile of 1st to die is UK and survivor is Non-UK domicile – there is £55,000 spousal exemption
If domicile of 1st to die is Non-UK and survivor is Non-UK domicile – there is a full spousal exemption.
In all circumstances, it’s better to review this taxation situation within your overall planning. Contact your local professional consultant for help and advice in drawing up your legal estate planning documents.
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