A guide to domicile elections; inheritance tax on UK and foreign assets
If you are UK-domiciled (broadly meaning the UK is your permanent home), you have to pay inheritance tax on worldwide assets. If you are not UK-domiciled, you only have to pay inheritance tax on UK-situated assets.
Generally, transfers between spouses (during life or on death) are exempt from inheritance tax. However, a limited spouse-exemption of £325,000 applies in relation to transfers from a UK-domiciled individual to a non-UK domiciled spouse.
Since 2013, a non-UK domiciled spouse can make an election to be treated as UK domiciled for inheritance tax purposes. This results in an unlimited inheritance tax spouse exemption, in terms of assets received from the UK-domiciled spouse.
However, it’s not all good news – a disadvantage of making an election is that the worldwide assets of the elector will be subject to inheritance tax rather than just those situated in the UK.
When can an election be made?
An election can be made by a non-UK domiciled individual during the lifetime of their UK-domiciled spouse (or following the latter’s death, as long as the spouse was domiciled in the UK for the seven years ending with the date of death). Normally, elections must be made within two years of death.
Should an election be made?
The decision to make an election and from what date requires consideration and the following factors may be relevant:
- the size of the individuals’ estates
- the value of the non-domiciled spouse’s overseas assets
- the availability of any inheritance tax relief and/or exemption
- whether the non-domiciled spouse has received chargeable gifts from their spouse within the last seven years, and
- the residence plans of the couple.
When does the election take effect?
The elector will be treated as domiciled in the UK from the date in the Notice of Election submitted to HMRC. This date must be:
- 6 April 2013 or later, and
- within the seven year period ending with the date the election is made for a lifetime election, or within the seven year period ending on the date of the UK-domiciled spouse’s death for a death election.
The elector and their UK domiciled spouse must be married on the effective date of the election.
When does the election cease to take effect?
An election is irrevocable as long as the elector remains UK tax resident. An election automatically lapses if the elector is non-UK resident for four successive tax years, beginning any time after the election has been made. The election will simply fall away after the end of the fourth year of non-residence and from this date, the individual’s non-UK assets will again fall outside the scope of inheritance tax.
If the elector is not UK-resident when the election is made, they must ensure that they become UK resident within four tax years in order to preserve the effect of the election.
An individual can re-elect to be treated as UK domiciled after an election has lapsed. All in all, the election to be treated as UKdomiciled for inheritance tax purposes is a very useful estate planning tool.
It is advisable to take legal guidance when considering whether or not to make the election, in order to ensure that it does not result in adverse inheritance tax consequences.
If you need clear and pragmatic legal advice, we’re here to help so please get in touch.