by Paul Beckwith
The European Commission is putting pressure on the UK to review “discriminatory” rules which mean that transfers between domiciled and non-domiciled spouses are subject to inheritance tax.
Spouse or civil partner (IHTM11032) relief is restricted to £55,000 where the transferor is UK domiciled but their surviving spouse or civil partner (IHTM13031) was not domiciled in the UK.
There are three types of common law domicile:
• domicile of origin
• domicile of dependence
• domicile of choice
These different types of domicile are explained in detail in the Residence Domicile and Remittance Basis Manual (RDRM) on the HMRC website. For inheritance tax, you must always remember that deemed domicile (IHTM13024) may apply.
Even if a person is domiciled outside the UK under common law, two special rules apply to those who have emigrated from the UK or to those who have been resident in the UK for tax purposes for many years (IHTA84/S267).
If either rule applies then, in most cases, they are treated as domiciled within the UK for inheritance tax purposes. So the definition of domicile for inheritance tax includes deemed domicile. For all other purposes, for example succession, the general law applies.
The two special rules are the three-year rule – IHTA84/S267 (1)(a) and the 17 out of 20 rule –IHTA84/S267 (1)(b).
The three year rule
For the rule to apply the taxpayer must have been domiciled in the UK both on or after December 10 1974 at any time within the three calendar years before the relevant event (the death or gift).
The 17 out of 20 rule
For the rule to apply, the taxpayer must have been resident (for income tax purposes) in the UK on or after December 10 1974 and in not less than 17 out of the 20 years of assessment, ending with the year of assessment in which the relevant event falls. The year of assessment is a tax year, so it runs from April 6 to April 5.
In a memo released last week, the EC has asked the UK government to review the IHT treatment of spouses to bring it in line with European law.
Taxation: Commission requests the UK to review inheritance taxation of spouses
The United Kingdom legislation provides that transfers between domiciled spouses or civil partners are exempt from inheritance tax. However, transfers between domiciled and non-domiciled spouses or civil partners are not exempt from inheritance tax.
Furthermore, in the latter case the rules on the nil rate band applicable to subsequent transfers differ and may result globally in a higher taxation. This difference in tax treatment of transfers between domiciled and non-domiciled spouses is of a discriminatory nature and contrary to EU rules (Article 18 TFEU).
The Commission’s request takes the form of a reasoned opinion (the second step of the infringement procedure). If there is no satisfactory reaction within two months, the Commission may decide to refer the matter to the Court of Justice of the European Union (Reference: IN/2010/2111).
It is, in fact, an issue which HM Treasury has earmarked to be addressed, with its most recent tax consultations “tracker”, including a plan to release a consultation on it “in autumn 2012”.
Inheritance tax (IHT): spouses and civil partners domiciled outside the UK
Consultation on legislation to increase the IHT-exempt amount that a UK domiciled individual can transfer to their non-UK domiciled spouse or civil partner; and allow individuals who are domiciled outside the UK and who have a UK domiciled spouse or civil partner to elect to be treated as domiciled in the UK for the purposes of IHT.
Anything that seeks to address and eradicate discrimination has to be a good thing and any change, whenever it is actually made, will have a significant impact on IHT planning where one spouse is UK domiciled and the other is not.
Until such legislation comes into effect, it is crucial that advice is taken on which assets to invest one’s money into and how these assets are held. For help and advice speak to a qualified independent international financial adviser from Blacktower Financial Management.
The appointed representatives of Blacktower Financial Management (International) Limited are not tax advisers. Before making any financial decisions relating to tax, you are strongly advised to seek professional advice from a qualified international tax consultant. Blacktower can introduce you to such a specialist should you require. Please contact us for further details on 289 355 685.
Blacktower Group has offices in the United Kingdom, Gibraltar, Portugal, Spain, France and Italy. Blacktower Financial Management (International) Ltd is licensed in Gibraltar by the Financial Services Commission (FSC) License No. 00805B Blacktower Financial Management Ltd is Authorised and Regulated in the UK by the Financial Services Authority.
Paul Beckwith is an International Financial Advisor working with Blacktower Financial Management (International) Limited