In summary, we are aware that the new IHT regime effective from 6th 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 lesser period. The consequence is that gifts/transfers of value in aggregate above £325,000 by the UK long term resident spouse/civil partner (‘spouse’) to their non-long term UK tax resident spouse will be within IHT and to avoid this consequence, 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.
The position before the October 2024 Budget
Transfers between spouses were exempt from IHT to an unlimited extent if both spouses were 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 6th 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 at the price of the global estate of the non-domiciled recipient spouse being within the scope of IHT. Once made the IHT domicile election could not be revoked but ceased to have effect when the electing individual left the UK and was not UK tax resident for 4 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) an IHT gift with reservation meaning the IHT 7 year clock did not operate and 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 to 5th April 2025 liability to IHT remains a domicile-based system. From 6th April 2025 a new residence-based system 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 in that 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 6th April 2025) those who have been UK tax resident for between 10 and 13 years will remain exposed to IHT for 3 years from the UK tax year in which they cease to be UK resident. An additional year is then added for each further year above 13 years spent as a UK tax resident up to a maximum of 20 years residence when the ‘tail’ within which the individual’s global estate remains within 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 6th 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. The election once made by the spouse who is not a long-term UK
resident will last until s/he has secured 10 consecutive UK tax years of non UK tax residence. NB failure to make the election will mean inter spousal gifts (especially from the UK long- term resident to the non-long term resident recipient spouse) are prima facie within IHT
save for the 1st £325,000 of gifts/transfers.
An area of concern is for example X (a long-term UK tax resident spouse) generates the income/gains or can fund via an inheritance or parental gift the purchase of the family home which X transfers 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 a gift by X to their spouse and if X dies before their spouse who remains unelected prima facie the value
of the gift above £325,000 will be with IHT on X’s death at 40%.
IHT domicile elections made before 30th October 2024 (budget day) remain in place, with the spouse making the election treated as deemed UK domiciled to 5th April 2025 and then long-term resident from 6th April 2025 until 4 consecutive tax years of non-residence have elapsed. This election can also be made after 30th October 2024 and before 6th April 2025 with the electing spouse being treated as IHT deemed UK domiciled until 5th April 2025 and then a long-term resident from 6th April 2025 until 10 consecutive tax years of non-residence have elapsed.
If anything written above concerns you
Please get in touch with us if you would like to discuss any of the above or think it may be relevant for you. In the first instance please contact Robert Schon.
His contact details are: info@brownhollidayclements.com
