The scope of inheritance tax (IHT) is determined by a person’s “domicile”. For those domiciled within the UK their worldwide assets are potentially liable to IHT and for those domiciled outside the UK the charge is restricted to the value of UK assets.
Certain statutory provisions deem people who are domiciled outside the UK to be domiciled here for IHT purposes if they have been tax resident within the UK for seventeen out of the previous 20 tax years or if they have been domiciled within the UK in the previous three years.
Historically the normally unlimited spouse/civil partner exemption from inheritance tax (IHT) had been restricted to £55,000 on a transfer from a UK domicile to a non-UK domicile. That exemption limit is now £325,000 and will increase in line with increases in the nil rate band itself.
Care will still need to be taken with lifetime gifts which can use the exemption and where it may be difficult to argue that any excess value is a potentially exempt transfer and not a gift with reservation of benefit.
It should be noted that the limited exemption can be used by gifts to a UK domiciled spouse to whom the giver was married before acquiring a non-domiciled spouse/civil partner. Records of such gifts would not normally be kept.
A non-domiciled spouse/civil partner now has the opportunity to elect to be treated as UK-domiciled for IHT purposes. The effect of such an election is to afford the normal unlimited exemption but the worldwide assets of the electing spouse will then potentially be exposed to IHT.
The election can be made in respect of lifetime transfers and also within two years of the death of the UK-domiciled spouse/partner.
Once made the election is irrevocable but it will cease to have effect if the person making the election is non-UK resident for four consecutive tax years following the date of the election. It may particularly benefit those non-domiciled widow(er)s who might leave the UK at some time in the future or perhaps are already non-UK resident.
In most cases by the time of the first death the survivor will be deemed domiciled within the UK for IHT purposes by virtue of long residence here and it may still be appropriate to insure the life of the UK-domiciled spouse/partner until those deeming provisions are in point.