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Government Contemplates IHT Changes for Non-UK-Domiciled Spouses

The UK Government plans to tweak Inheritance Tax (IHT)-related laws to ensure UK-domiciled and non UK-domiciled spouses and civil partners are treated in a similar way for IHT purposes.

The planned measure concerns transfers of assets between spouses and civil partners where one of the couple is not domiciled in the UK.

Under the current law, transfers, whether gifts made during a person's lifetime or assets transferred upon the death, are generally exempt from IHT if both partners are domiciled in the UK. However, the transfers are IHT-free up to a limit of £55,000 if one of the couple is domiciled overseas. Currently, all persons, regardless of their domicile status, benefit from an IHT threshold (nil-rate band), or the amount up to which their estate (property and assets transferred upon death) is not IHT liable.

Now the Government has launched a consultation to address the current discrepancy in IHT charges for UK and non UK-domiciled spouses and civil partners by raising the IHT-exempt limit of £55,000 on the value of transfers to a non-UK domiciled spouse or civil partner to the prevailing nil rate band (£325,000 for 2012/13). The new rules will affect transfers made on or after 6 April 2013.

In addition, it has been proposed that non UK-domiciled spouses or civil partners will be able to elect whether they want to be treated as UK domiciled for IHT purposes. This new election regime will give couples with non UK-domiciled members the benefit of total IHT exemption on transfers. Elections will be irrevocable while the electing person continues to remain a UK resident. Elections that follow a death will be valid if they are made within two years of the death and only where death occurs on or after 6 April 2013.

The Government will consult on the new measure in the summer and the new legislation is expected to be included in the Finance Bill 2013.