Introduction

UK domiciled spouses or civil partners transferring assets between themselves, and non-UK domiciled individuals transferring assets to a spouse or civil partner (regardless of domicile), can transfer any value of assets free of Inheritance Tax (IHT). However, where the donor is UK domiciled and the recipient spouse or civil partner is non-UK domiciled, the spouse exemption is capped at the amount of the nil rate band (currently £325,000) and any gifts in excess of this amount may be subject to IHT. 

This note provides an overview of an election non-UK domiciled spouses and civil partners can make in order to be deemed UK domiciled for IHT purposes, which would result in an uncapped spouse exemption being available.

What is domicile?

Domicile is a common law concept. It does not have a statutory definition. You are generally considered to be UK domiciled if you intend to live in the UK permanently or indefinitely, or your father (or mother if your parents were not married) is considered to be domiciled here, but the position can be complex. 

Domicile is a key IHT concept, as UK domiciled individuals are subject to IHT on their worldwide assets whereas non-UK domiciled individuals are only subject to IHT on their UK situated assets. 

For IHT purposes you can be deemed to be domiciled in the UK if you were or are: 

• Legally UK domiciled within the three years preceding a relevant transfer for IHT purposes; or 

• UK resident for at least 15 out of 20 tax years preceding the tax year in which the relevant transfer occurs, and at least one of the four tax years ending with the tax year in which the relevant transfer occurs; or

• A formerly domiciled resident (i.e. are UK resident, were born in the UK and have a UK domicile of origin, which is a UK domicile at birth) for the tax year in which the relevant transfer occurs, and provided you were also UK resident in one of the two preceding tax years.

Residence for these purposes is as determined for income tax purposes. 

Transfers are relevant transfers, and so may give rise to IHT, where they are made on death or in the seven years preceding death. In addition, gifts to most types of trust at any point in a person’s lifetime are relevant transfers.

Spouse exemption

The spouse exemption is unlimited if neither of the spouses or civil partners is UK domiciled or if a non-UK domiciled individual makes gifts to a UK domiciled spouse or civil partner. However, the spouse exemption is capped when a UK domiciled individual gives assets to a non-UK domiciled spouse or civil partner. 

The capped spouse exemption is aligned to the nil rate band and so is currently £325,000. The spouse exemption is used against any gifts made to a non-UK domiciled spouse or civil partner, whether or not these are during the seven years prior to death. This means that the IHT spouse exemption can be wasted. 

For example, suppose a UK domiciled individual, who had not made any previous spouse transfers, gave £500,000 to his non UK domiciled wife on 1 January 2018 and then died on 1 May 2023. During his lifetime the £500,000 gift would be reduced by the £325,000 spouse exemption, meaning that he had made a potentially exempt transfer of £175,000. As he died within seven years of making the gift, the £175,000 potentially exempt transfer becomes chargeable and IHT may be payable.  

The available capped spouse exemption on lifetime gifts or bequests on death is reduced by the value of any previous transfers that qualified for the spouse exemption during the donor’s lifetime. In our example, the entire capped spouse exemption was used in lifetime, and so no exemption remains to the estate. IHT may therefore be payable on the £175,000 chargeable lifetime gift and the value of any assets owned on death, subject to the availability of the nil rate band and any reliefs or exemptions.  

Election to be UK domiciled for IHT purposes

Non-UK domiciled individuals who have a UK domiciled spouse or civil partner can elect to be treated as domiciled in the UK for IHT purposes only (i.e. not for other taxes such as income tax or capital gains tax). This enables assets to be transferred between spouses or civil partners free of IHT, but means that the worldwide estate of the individual who makes the election is within the scope of IHT. 

The election needs to be made in writing to HMRC. There is no prescribed form, though HMRC request that certain information is included in the election. It can be made any time after marriage or registration of civil partnership. 

Elections can be made by the non-UK domiciled individual either during the lifetime of the UK domiciled individual (a ‘lifetime election’) or following his or her death (a ‘death election’). In either case the election can be backdated to apply from an earlier date and so any gifts which were made from the date specified in the election should benefit from the uncapped spouse exemption available to UK domiciled couples. 

If an election is made now and backdated the earliest date it can apply from is the later of (i) the date of marriage or registration of civil partnership or (ii) up to seven years before the date the election is made (in the case of a lifetime election) or up to seven years before the date of death of the UK domiciled individual (in the case of a death election). 

Care should be taken when backdating an election, as the non-UK domiciled individual would be treated as UK domiciled for all IHT purposes from the date specified in the election, meaning that gifts by the individual which would previously not have been subject to IHT may become chargeable. This could include gifts to other individuals made in the seven years before death, including gifts to children, and gifts into trust, which can give rise to IHT charges both during lifetime and on death. There may also be implications for the trust’s ongoing IHT position.

A lifetime election can be made at any time. A death election must be made within two years of the death of the UK domiciled individual, or such longer period as HMRC may allow. 

Elections are irrevocable. However, they cease to have effect if the electing person is non-UK resident for income tax purposes for more than four full consecutive tax years. The election will cease to have effect from the end of the four-year period. 

The election does not lapse on divorce or dissolution of civil partnership, nor can it be revoked. This means that a non-UK domiciled individual could make the election, but, in the event of the relationship ending, that individual could find that the election is no longer to their benefit and their entire estate is now within the scope of IHT. 

Consequences of making the election

If the election is made:

• The UK domiciled individual can give any value of assets to their non-UK domiciled spouse or civil partner IHT-free. 

• The worldwide assets of the non-UK domiciled individual will be within the scope of IHT, although the nil rate band and any other relevant reliefs or exemptions will be available.

• The income tax and capital gains tax position of the non-UK domiciled individual who makes the election will be unaffected, and the remittance basis of taxation will continue to be available where relevant.  

Consequences of not making the election

• The UK domiciled individual can give or leave assets worth up to the amount of the capped spouse exemption (£325,000 until 6 April 2028) to their non-UK domiciled spouse or civil partner free of IHT. If the individual dies within seven years of making lifetime gifts and/or leaves assets to their spouse or civil partner on death, IHT will be payable to the extent the value of the gifts and bequests exceeds the available spouse exemption, unless the nil rate band and/or other IHT reliefs or exemptions are available. It should be borne in mind that the spouse exemption may not be available on amounts chargeable on death if it has been offset against lifetime gifts that never became chargeable.

• Non-UK assets owned by the non-UK domiciled spouse or civil partner will be outside the scope of IHT. 

• Non-UK domiciled spouses or civil partners who hold UK situated assets will still be within the IHT regime based on the value of assets they own in the UK. In some cases, interests in foreign companies and partnerships may be deemed to be UK sited assets if the company or partnership concerned owns UK residential property.