Although in the UK assets passing between spouses or civil partners are generally exempt from inheritance tax, where, as in Jing and Eric’s case, the deceased was UK domiciled but the surviving spouse or civil partner is non-UK domiciled, the exemption is restricted to the value of the nil-rate band (currently £325,000, $404,326, €378,153) unless the surviving spouse elects to be treated as domiciled in the UK for the purposes of the spouse exemption.
The election must be made within two years of the death of the deceased and only applies for inheritance tax purposes.
Once made, an election is irrevocable but will cease to have effect if the person making it is not resident in the UK for four successive tax years beginning at any time after the election is made.
Not always tax free
Jing was not expecting to have to pay any UK inheritance tax at all, in the commonly held misbelief that all transfers between spouses are tax free in the UK.
It was therefore an unwelcome surprise to learn that, although the house was now hers outright, as Eric’s half share had passed to her by survivorship, the value of his half share of the house still formed part of his taxable estate for inheritance tax purposes and, if she did not make the election, she would have to pay inheritance tax on the value of his share above £325,000 at the rate of 40%.
As the house was worth around £2m in total, she would have to pay £270,000 in tax (£675,000 x 40%), unless she elected to be treated as UK domiciled. Jing did not like the idea of making such an election, even if only for inheritance tax purposes, as then all her own assets wherever situated would potentially be subject to UK inheritance tax in the event of her death.
Jing decides that she still wants to retain the house as a base for when she is in the UK and that, in order not to be out of pocket, she will keep an entitlement to sufficient assets from Eric’s estate to pay the inheritance tax owing.
Jing writes to Peter and Jane explaining that she has asked her solicitor to prepare the paperwork necessary to vary her entitlement to virtually the whole of what she is entitled to receive from Eric’s estate under the intestacy rules.
Inheriting the family business
Peter is very pleased to hear about Jing’s intentions and that he and Jane will now share most of their father’s estate after all. He had been considering whether he could make a claim for a larger share of his father’s estate but now turned his thoughts to whether his father’s estate could be divided between him and his sister in a way that ensures he receives the shares in EW Ltd and his sister the other assets.
Peter is advised that this will not be possible. The shares in EW Ltd qualify for business property relief and therefore are exempt from inheritance tax but the rest of his father’s estate, including the value of his shares in W Family Investment Company Ltd, after deduction of the nil-rate band, will be subject to inheritance tax at the rate of 40%. This means that the value of the shares in EW Ltd forms substantially more than half of the net value of Eric’s estate and so, to maintain equality, Jane will have to receive a significant number of shares in EW Ltd.
Peter’s excitement is however short-lived. Peter had previously received and ignored a letter from someone claiming they were being supported financially by Eric and asking for money. He has now received another letter threatening to bring a claim against Eric’s estate unless a substantial payment is made.
Peter shows the letters to his solicitor.
