Legislation will be introduced in Finance Bill 2013 to change the treatment of transfers between UK-domiciled individuals and their overseas other halfs in two ways.
The lifetime limit cap will be increased to the level of the prevailing nil-rate band level and, under a new election regime, individuals domiciled other than in the UK and who are married or in a civil partnership with a UK domiciled person will be able to elect to be treated as UK-domiciled for inheritance tax purposes.
In documents published earlier this week, HMRC stated the new legislation will allow individuals who have become UK domiciled to make a retrospective election to cover an earlier period when they were non-UK domiciled.
There is also provision for individuals whose marriage or civil partnership has been dissolved to make a retrospective election to cover the period they were married or in civil partnership with a UK domiciled person.
Where an individual chooses not to elect for UK domicile treatment their overseas assets would, as now, be exempt from inheritance tax but any transfers from their spouse or civil partner would be subject to the increased cap.
Individuals who choose to make an election would benefit from uncapped IHT-exempt transfers from their spouse or civil partner, but subsequent disposals by them would be liable to IHT (subject to their own nil-rate band), irrespective of the location of the assets.
The lifetime limit on the amount that can be transferred exempt from IHT to a spouse or civil partner domiciled outside the UK (or treated as such for IHT purposes) will be increased from its current level of £55,000.
Initially the cap will be raised to £325,000. Going forward, HMRC plans to link its level to any future changes in the nil-rate band.
The election will only affect an individual’s treatment for IHT purposes, under the plans put forward.
The election will need to be made in writing to HMRC and may be made at any time after marriage or registration of the civil partnership.
Elections that follow a death will only be valid if they are made within two years of the death or a longer period if a HMRC officer allows; and only where death occurs on or after 6 April 2013.
The personal representatives of non-domiciled individuals will be able to make a death election on their behalf.
Electing spouses making either a lifetime or death election will be able to choose a date the election applies from going back up to a maximum of seven years so that any lifetime gifts during that period are covered by the election. The earliest date that can be specified is 6 April 2013.
Elections will be irrevocable while the electing individual continues to remain resident in the UK. An election will cease to have effect if the electing person is resident outside the UK for more than four full consecutive tax years.