Robert Schon runs through tax changes which might affect you
Following the autumn Budget, the new Inheritance Tax (IHT) regime, which takes effect from 6 April 2025, will have an impact on married couples/civil partners where one has been UK tax resident for 10 or more UK tax years, and the other has been a UK tax resident for a shorter period.
IHT Spouse/Civil Partner Liability and Exemption
The result of this change is that gifts or transfers totalling more than £325,000 by the UK long term resident spouse/civil partner (‘spouse’) to their non-long term UK tax resident spouse will be liable for IHT. To avoid this, the non-long term resident recipient spouse will need to make an ‘IHT election’ to HMRC, agreeing to bring their worldwide estate within IHT until they have lived for 10 consecutive UK tax years outside the UK. New guidance on how to do this is yet to be issued. Current guidance
Can be found by Googling HMRC ITHM 13043.
The Position before the October 2024 Budget
Unlimited transfers between spouses were previously exempt from IHT if the spouses were both either domiciled or non-domiciled in the UK. If, however, the recipient spouse was not UK domiciled and the transferor spouse was UK domiciled, the IHT exemption was limited to the amount of the IHT nil rate band, which since 6 April 2013 has been £325,000.
Since July 2013 an election could be made to cause the non-UK domiciled recipient spouse to be deemed UK domiciled for IHT purposes, so that the full spouse exemption was secured as long as the global estate of the non-domiciled recipient spouse was declared as being within the scope of IHT.
Once this choice was made, it could not be revoked, but it ceased to have effect when the electing individual left the UK and was not UK tax resident for four consecutive tax years.
Failure to make this election could result for example in any outright gift by the UK domiciled spouse to their recipient non domiciled spouse being (amongst other things) what was called an IHT gift with reservation. This meant the IHT seven-year clock (which allows gifts made seven or more years before death to be tax free) did not operate. As a result the gifted asset was potentially in the IHT estate of both the donor UK domiciled spouse, and the recipient non domiciled spouse and so potentially chargeable to IHT on the death of both spouses.
The Change
Pre budget and up to 5 April 2025, liability to IHT remains a domicile-based system. However, from 6 April 2025, a new residence-based system, ie based on where you do actually live, will be introduced.
This will affect the scope of property brought into IHT for individuals and trusts once the individual/settlor has been UK tax resident for 10 or more UK tax years because their global estate (including offshore trusts they may have created/funded) will be within IHT.
For individuals leaving the UK (whether they left pre or post 6 April 2025) those who have been UK tax resident for between 10 and 13 years will remain exposed to IHT for three years from the UK tax year in which they cease to be UK resident.
An additional year of liability is added for each further year above 13 years spent as a UK tax resident, up to a maximum of 20 years residence. At this stage the period within which the individual’s global estate remains liable for IHT will be 10 years post their ceasing to be UK tax resident. This assumes they do not again become UK tax resident in that 10 year period.
The Impact of the Change on the IHT Spouse Exemption
From 6 April 2025 the above described IHT domicile election rules will be amended so that the spouse of a long-term resident who is not themselves a long-term resident (meaning they have not yet been a UK tax resident for 10+ UK tax years) can elect to be treated as an IHT long-term resident.
That election will last until s/he has secured 10 consecutive UK tax years of non UK tax residence.
Importantly, failure to make the election means inter spousal gifts (especially from the UK long- term resident to the non-long term resident recipient spouse) are set to be deemed to fall within IHT except for the first £325,000.
Watch Out for Large Sum Transfers
To give an example, X (a long-term UK tax resident spouse) might fund via an inheritance or parental gift the purchase of the family home which they then transfer into joint names with their non-long term UK tax resident spouse who has not elected to HMRC to be treated as a long-term IHT UK tax resident.
This is considered a gift by X to their spouse, so if X dies before their spouse, the value of the house above £325,000 would be liable for IHT on X’s death at 40%.
The Rules on Domicile Election
IHT domicile elections made before 30 October 2024 (budget day) remain in place, with the spouse making the election treated as deemed UK domiciled to 5 April 2025 and then long-term resident from 6 April 2025 until four consecutive tax years of non-residence have elapsed.
This election can also be made after 30 October 2024 and before 6 April 2025 with the electing spouse being treated as IHT-deemed UK domiciled until 5 April 2025 and then a long-term resident from 6 April 2025 until 10 consecutive tax years of non-residence have elapsed.
If you may be affected by any of the above, please do not hesitate to get in touch.
Robert Schon can be reached at rschon@streathers.co.uk or on 020 7267 5010, 020 3940 3795 or 07749 051 312. Streathers Highgate Office is at 18 Highgate High Street, Highgate N6 5JG.