Transfers on Death Print

On death, all transfers between husband and wife are exempt provided both spouses are either domiciled in the UK, or both spouses are not actually domiciled, or deemed domiciled in the UK. In the case of one spouse being domiciled, and the other not, transfers made by the non-domiciled spouse are exempt.

Where transfers are made by the UK-domiciled spouse to the non-domiciled spouse, only assets to the value of the nil-rate band, currently £325,000, are exempt in addition to the lifetime allowance. Accordingly, subject to any other reliefs, the maximum amount that the non-domiciled spouse could receive is £650,000.

A potentially far more beneficial relief allows the non-domiciled spouse to elect to be treated as domiciled in the UK for IHT purposes on the death of the UK-domiciled spouse. The election is irrevocable whilst the electing individual remains resident in the UK, and until such time as the individual re-establishes their non-domicile status. This may only be achieved by the individual leaving the UK until such time as they have not been resident in the UK for up to 6 complete tax years depending upon the amount of time spent in the UK before departure.

This election is not restricted to transfers on death, but can be used to relieve lifetime transfers where the UK-domiciled spouse dies within 7 years of making the transfer to the non-domiciled spouse. As a charge to IHT could only arise on death, the election may only be made after the transferor has died, and there is a 2 year time limit from the date of the death of the UK-domiciled spouse to make the election.

The election may be retrospective and can apply for a period of up to 7 years prior to the death of the UK-domiciled spouse, but cannot relate to a period prior to 6 April 2013. Accordingly, gifts made by a UK-domiciled spouse to a non-domiciled spouse before 6 April 2013 could still be caught for IHT if the domiciled spouse died before 6 April 2020 and has made gifts to the non-domiciled spouse before 6 April 2013, but less than 7 years prior to death.

Specialist advice should be sought before any inter spouse transfers of assets are made, and in drafting wills.

Certain liabilities are not allowed as a deduction for IHT purposes. In particular, IHT relief for a debt will not be due where:

  • A loan secured on a UK home has not been used to fund the purchase or to acquire UK situs assets, but is used in some way offshore, say for the purchase of another asset, or kept on deposit in an overseas bank account, and the offshore asset is an excluded asset for IHT purposes when the individual dies. This measure is directed at individuals who are not domiciled in the UK;
  • A loan used to acquire assets which are relevant business property. This includes business property, agricultural property or woodlands. The restriction here acts by setting the relief firstly against the business property, and only any excess liability may be offset against assets chargeable to IHT.
  • A liability which would otherwise qualify as a deduction, but is not repaid on or after death out of the assets of the deceased. However, where it can be shown that the unpaid part of the liability is not repaid for bona-fide commercial reasons and is not part of any arrangements to obtain a tax advantage, the unpaid liability may be allowed as a deduction.

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