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10th December 2019

Can I leave my Estate to my Non-British Spouse Tax-Free When I Die?

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..and would it make a difference if my spouse becomes a UK citizen?

In the UK, the key test determining Inheritance Tax treatment is known as domicile. This is not the same as citizenship, nationality or residence, and unfortunately the domicile test is typically the hardest of those to judge with confidence. Your domicile is often described as your “permanent home country”. How do I know where I am domiciled?

The answer to this question may be obvious for many people, but for many others it is not. It is more and more common for many clients to have many foreign connections – foreign family and/or birth, working abroad, a history of living abroad, and foreign business interests are all very normal. Every country applies their own rules, using different tests and different terminology.

Under British law, every person is born with a domicile of origin based on their mother’s domicile (or father if married) and may change domicile as a child if moving with their parents. To change domicile as an adult, you must acquire a new domicile of choice by showing a settled intention to indefinitely reside in a new country. At the same time, the existing domicile must be abandoned. Becoming a UK citizen is not the same as becoming UK domiciled and proper advice should be taken to analyse all the evidence that HMRC would use to judge whether a UK domicile has been gained. No assumptions should be made as it can often cause disastrous tax consequences for a person to plan their affairs on the assumption, for instance, that they are not UK domiciled only for HMRC to disagree with this assumption after death when it is too late to take any action to change the outcome.

A person will also become ‘deemed domiciled’ in the UK for tax purposes if they are ‘resident’ in the UK for 15 of the last 20 years (or just one of the last two years for a person with a UK domicile of origin). Residency is determined by a separate (and complex) test.

What difference will it make for Inheritance Tax?

On the death of a UK domiciliary, UK Inheritance Tax applies to their whole worldwide estate (although other countries may also tax foreign assets and advice should be taken on this point). By contrast, on the death of a non-UK domiciliary, Inheritance Tax applies only to assets in the UK. For some assets, such as land or buildings, it is obvious where the asset is ‘sited’ but for other assets (such as loans, investments, foreign currency bank accounts, etc) the situs of the asset is less clear and specialist rules will apply to determine this.

On the death of one spouse or civil partner, no Inheritance Tax is charged on assets passing to the surviving spouse/civil partner so long as either (a) they are both UK domiciled or (b) neither of them is UK domiciled.

If one spouse is UK domiciled and the other is not, and the UK domiciled spouse dies first, then only assets of up to £325,000 may be left to the surviving spouse tax free and this limit is reduced by the value of all gifts made to the non-domiciled spouse during lifetime. Any assets above that limit will be taxed in the normal way, first using the Nil Rate Band and other allowances and then being taxed at 40%.

However, the surviving spouse has the option to make an election to be treated as UK domiciled in order to inherit a greater value of assets without suffering Inheritance Tax, but her own estate would then be brought into the UK Inheritance Tax net until the election expires after 4 years of non-residency in the UK.

What difference does it make to my Will?

Apart from affecting the tax, and therefore, what will be inherited, domicile can also affect whether the Will is valid in respect of certain assets.

What should I do?

If there is any possibility that either of you may not be UK domiciled, then please seek specialist advice from a STEP qualified solicitor. At Hewitsons all our solicitors are STEP qualified, or STEP students. For more information on any of the items raised in this article please contact Tobias Gleed-Owen on 01223 532718 or click here to email Tobias.