Inheritance tax exemption - Non-domiciled spouse or civil partner

Ray Magill reviews the inter-spouse of civil partner IHT exemption.

June 2021

The inter-spouse or civil partner IHT exemption is well known. Less understood is the limit where the transferee is non-domiciled. Under S.18(2) IHTA 1984 the exemption is limited to a cumulative £325k [it was only £55k before 6 April 2013, and lower still before 9 March 1982] if the transferor is UK domiciled. The £325k is reduced by any previous amount(s) exempted by S.18, notably not only S.18(2). Thus, if UK-domiciled Jack has only ever made one gift, of £50k, to his non-domiciled wife Jill, the exemption on his death might be expected to be £275k. But, if Jack, during a previous marriage to Janet (UK domiciled), from whom he is now divorced, had made substantial (and of course fully exempt) gifts to Janet, these too would reduce, and perhaps extinguish the available spouse exemption both on the £50k gift to Jill and on Jack’s death. HMRC are well aware of this oddity, see IHTM11033 example 2.

Executors of anyone in Jack’s position might already feel it unduly arduous to have to determine the value of all ‘transfers of value’ he made to Jill during their marriage. To also have to discover the value of all such transfers during a previous marriage would surely be an impossible task.

To cope with the position on death, an acceptable remedy in many cases might be for the surviving spouse or civil partner to make an election under S.267ZA to be treated as UK-domiciled. But that does not address the position as regards lifetime transfers of value, where the extent of the exemption matters in considering whether S.102 FA 1986 (reservation of benefit) applies.

Amending S.18(2) by changing the final words to ‘this subsection’ would help, but still leave executors needing to review the finances throughout the marriage of the deceased.

The much lower exemption before April 2013 will probably mean that executors have previously felt able to assume it was already used up by earlier transfers. But more thought needs to be given to this now.