The Finance Bill 2013 has introduced a number of changes which will effect how Inheritance Tax (IHT) will operate. We will be highlighting each change in detail. The first change we will look at is the lifetime exemption for transfers from UK domiciled spouses and civil partners to their non-UK domiciled partners.
Since 1983, a lifetime gift or an asset transferred on death between a UK domiciled spouse and his non-UK domiciled spouse is exempt for the first £55,000. Any lifetime gift over the exempt amount is deemed to be a potentially exempt transfer (PET) which will only became chargeable to IHT if the donor dies within seven years of making the gift.
Because of the Finance Bill 2013, any lifetime gift made on or after 6th April 2013 will now be exempt for the first £325,000, which corresponds to the nil rate band for IHT. This means that the UK domiciled spouse can now transfer twice the value of the nil rate band to his non-UK domiciled partner before incurring a tax liability.
SO HOW WILL THE NON-DOMICILED SPOUSE EXEMPTION INTERACT WITH THE NIL RATE BAND?
The easiest way to demonstrate the interaction is by giving an example:-
Simon, who is UK domiciled, is married to Simone is Swiss domiciled. On 31 December 2013, Simon gifts Simone a property in London with a value of £300,000. On 1 January 2015, Simon gifts Simone investments with a value of £100,000. Simon then dies leaving an estate at death of £500,000 to Simone.
Gift Of Property Of £300,000 On 31 December 2013
The gift of £300,000 is covered by the non-domiciled spouse exemption of £325,000. This gift will not be subject to IHT.
Gift Of Investments Of £100,000 On 1 January 2015
Out of the total lifetime exemption of £325,000, £300,000 was applied to the gift of property on 31 December 2013. Therefore, only £25,000 can be applied to the gift of the investments. Therefore, £75,000 of this gift will be deemed to be a potentially exempt transfer.
You should also note that because the non-domiciled spouse exemption has been fully used on lifetime gifts, the exemption cannot be applied on Simon's estate at the time of death.
If Simon dies BEFORE 1 January 2022, then his chargeable estate will be the PET of £75,000 plus the value of his estate on death of £500,000. A total of £575,000.
If Simon dies AFTER 1 January 2022, then the PET of £50,000 falls out of consideration and chargeable estate will just be the value of his estate on death of £500,000.
SO HOW WILL THE NON-DOMICILED SPOUSE EXEMPTION INTERACT WITH THE TRANSFERABLE NIL RATE BAND?
On the death of the first partner, any unused nil rate band can be transferred to the surviving partner. How does this work in practice? Again, an example is the best way of showing the interaction between the two.
Gerald, domiciled in the UK, is in a civil partnership with Gunther who is domiciled in Germany. On 6 April 2013, Gerald gifts investments worth £500,000 to Gunther. This means that £325,000 of the gift is covered by the non-domiciled spouse exemption with the remaining £175,000 deemed to be a potentially exempt transfer.
If Gerald dies before 6 April 2013 and the value of his estate on death is £75,000, then the chargeable estate will be the estate on death of £75,000 plus the potentially exempt transfer of £175,000 (i.e. a total of £250,000). Assuming that the current nil rate band of £325,000 will still apply, then there will be an unused nil rate band of £75,000 (i.e. £325,000 less £250,000) which can be transferred to Gunther's which, on his death, his estate will benefit from.
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