In mid October, the EC in its monthly “infringement update”, highlighted the UK’s current laws on the IHT treatment of transfers between spouses as being discriminatory and warned that if there had been “no satisfactory reaction” within two months it would refer the matter to the Court of Justice of the European Union.
However, HM Revenue & Customs has today published a technical note and draft legislation setting out a decision announced in this year’s Budget by Chancellor George Osborne to amend the offending article.
Specifically, HMRC has proposed increasing the current amount which a spouse can transfer to his or her non-UK domiciled partner within their lifetime free of IHT from £55,000 (at which it has been set since 1982) to £325,000. In the future this amount will be linked to any further changes to the exemption limit.
HMRC also proposed a new “election regime” under which a spouse with a UK domiciled partner who is not domiciled in the UK can elect to be treated as UK domiciled for IHT purposes. This means the partner would be entitled to the unlimited spouse exemption.
If approved, the new rules would be enacted within the Finance Act 2013.
Gerry Brown, technical manager at Prudential, welcomed the changes but said there is still a conflict of interest between the UK’s IHT legislation and its rules on domicile.
“The fundamental question is still – how is our IHT system supposed to work? Is it to be based on domicile, or are we to allow the freedom to transfer to spouses? There’s a conflict between the two, and arguably, you can’t have it both ways,” said Brown.
“If you are arguing that that there should be complete freedom to transfer unlimited amounts to a spouse, regardless of his or her domicile, then the UK IHT system is going to have a problem.
“People with non-dom spouses – which are much more common nowadays than ever before, with the increase in international mobility – will be able to avoid our IHT very easily.”
Chris Lean, a consultant at Prague-based advisory firm Square Mile Financial Services, said the change presents a clear opportunity for international advisers.
“Should the Finance Bill be passed as proposed, there is opportunity here for advisers to review the best way of mitigating IHT in light of the choices now offered by HMRC,” said Lean.
“Correct financial planning will now surely remove a substantial burden from an non-UK domiciled spouse upon the death of a UK domiciled spouse or civil partner and should be welcomed.”
To read a copy of the technical note click here
