Right elections can minimise the impact of inheritance tax charge and increase family wealth.
Inheritance tax (IHT) charges are based on domicile status. Domicile is a common law concept and is not defined in statute for tax purposes. Broadly, it is where an individual has their permanent home or intends to settle permanently. Individuals domiciled in the UK are liable to IHT on their worldwide assets; individuals whose domicile lies outside the UK are only liable to IHT on assets situated in the UK.
Current threshold
All individuals, irrespective of their domicile status, benefit from an IHT nil-rate band, currently £325,000 (since 6 April 2013). Transfers of assets between spouses and between civil partners, whether gifts made during a person’s lifetime or transfers of assets occasioned by the death of one of the couple, are generally exempt from IHT. Where the spouse or civil partner to whom the assets are transferred does not have a UK domicile there is a lifetime limit (cap) on the value of the assets that can be transferred free of IHT. The cap is currently equal to the nil-rate band of £325,000.
Domicile election
Individuals domiciled other than in the UK and who are married or in a civil partnership with a UK domiciled person are able to elect to be treated as UK-domiciled for IHT purposes. The main advantage of the election is that they would benefit from uncapped IHT-exempt transfers from their spouse or civil partner. But on the flip side, their overseas assets come under the IHT charge, which could be very disadvantageous if they do not have any intention to come and live in UK and they have higher value of overseas estate.
The election to be treated as domiciled in UK under IHTA 1984 section 267ZA is if condition A or B is met.
Condition A is that:
- the person’s spouse or civil partner is domiciled in the United Kingdom at the time the election is made, and
- the person is not domiciled in the United Kingdom at that time.
Condition B is that:
- the person’s spouse or civil partner died on or after 6 April 2013 and was domiciled in the United Kingdom at the time of death, and
- the person was not domiciled in the United Kingdom at that time.
A lifetime or death election is to be made by notice in writing to HMRC and cannot be revoked. A lifetime election takes effect from the day on which it is made. A death election must be made within two years of the death of the spouse or civil partner, and is treated as having taken effect from immediately before any transfer treated as made by section 4 immediately before the death of the spouse or civil partner.
Useful links:
- HMRC full Manual guidance IHTM11033
- ACCA guidance ‘how to reduce inheritance tax’
Article from ACCA In Practice