x Abu Dhabi, UAEFriday 21 July 2017

UK inheritance tax rules separates domicile from residency

On your side: UK inheritance tax rules state that transfers of assets between spouses are usually free from tax at all times and also at death, but only if both parties are UK domiciled, a legal concept separate to residency.

I saw an article that you wrote a while ago about the gift limits on death for a British national with a foreign spouse. I am British and my wife is from Japan and as we are getting older I am keen to know what this means for us. We live in Al Ain, but in due course will probably make the United Kingdom our base. SD, Al Ain

UK inheritance tax rules state that transfers of assets between spouses are usually free from tax at all times and also at death, but only if both parties are UK domiciled, a legal concept separate to residency. As a Japanese national not living in the UK, your wife will not be UK domiciled. Generally there are no tax liabilities on transfers between husbands and wives, both when living or on death, but this has been different if one party is not UK domiciled.

Since 1982, the limit had been just £55,000 (Dh316,750). Under UK law everyone has a "nil-rate band" - the amount that can be transferred to another party on death without liability to inheritance tax of 40 per cent. This is currently £325,000. UK Finance Bill 2013 confirms that from April 6 of this year, the lifetime limit on the value of assets that can be transferred inheritance-tax free has been increased to the amount of the applicable nil-rate band.

In addition, a new election regime has been included under which non-UK domiciled spouses can elect to be treated as UK domiciled for inheritance-tax purposes. The means that the spouse would be entitled to the unlimited spouse exemption, but also means that any subsequent disposals in excess of the nil rate band would be liable to inheritance tax, regardless of where the asset is located.

Clearly, this must be thought through and the consequences considered before taking action as it will not always be favourable to go down this route. Also, it appears that this is possible only where the electing party is resident in the UK and is irrevocable while resident in the UK, but will cease if they become non-resident for more than four consecutive tax years.

 

Keren Bobker is an independent financial adviser with Holborn Assets in Dubai. Contact her at keren@holbornassets.com