The Inheritance Tax Rate for People Married to a Non-UK Domiciled Spouse

When it comes to mixed domiciled marriages, the inheritance tax rate can vary greatly compared to couples domiciled in the UK. The truth is, while archaic, the concept of ‘domicile’ maintains a lot of pull when it comes to ascertaining liability to tax. This includes everything from capital gains tax to income tax, and of course, inheritance tax (IHT).

At Newnham & Son, we believe you have the right to know how your relationships and marital status will affect your finances. With this in mind, we’ll be identifying an inheritance tax trap for some mix-domiciled marriages in the UK. We’ll also give you some practical tips on how to overcome these traps.

What Is a Domiciled Person?

A person’s domicile status depends on the country that person regards as their home. Typically, they would live there on a day-to-day basis or at least the majority of the year. When it comes to your inheritance tax rate, this rule varies slightly. In fact, since April 6, 2017, a person is domiciled once they live in the UK for a minimum of 15 out of 20 tax years.

Once the law considers a person UK-domiciled, they will receive an inheritance tax charge on worldwide assets as well. However, these charges differ when it comes to inter-spouse transfers. Let’s have a closer look…

Understanding Inter-Spouse Transfers

Whether you’re planning your income, capital gains, or inheritance tax rate, you will most likely have to re-arrange or transfer some of your assets to your spouse and vice versa. This is a completely legal way of tax planning. It is also a great way for each spouse to own enough assets to use the various tax exemptions available for IHT or capital gains.

Traditionally, these inter-spouse transfers don’t have any tax charges. However, when it comes to transferring assets to a non-UK domiciled spouse, the rules differ slightly. Unlike with transfers from one UK spouse to another, those made to a non-UK domiciled spouse have limits. Since 2016, the transfer limit is £325,000 compared to just £55,000 in 2013.

Let’s have a look at two different examples. In example one, John and his wife Jane are both domiciled in the UK. John would like to transfer his home worth £500,000 to Jane. Because they’re both domiciled in the UK, they won’t face any charge. Example two is Rick and Rosy. Rick (UK-domiciled) would like to transfer his home worth £825,000 to his wife Rosy. Because she’s not UK-domiciled, they will have to pay an inheritance tax rate on £500,000 of the price of the house.

While it’s clear that transferring assets from a UK-domiciled to a non-UK domiciled spouse has its downfalls, the same is not the case when transferring assets the other way around. For example, if Rosy owns the house and transfers it to Rick, neither spouses would have to pay inheritance tax.

The above rules also apply if the UK-domiciled spouse dies. For example, if Rick dies, leaving his estate to Rosy, Rosy would have to pay inheritance tax on his estate. If she were UK-domiciled, she wouldn’t have to pay any charges.

Get More Information on Your Inheritance Tax Rate From Newnham & Son

Over the years, the number of mixed domiciled households has increased significantly. Unfortunately, very few of these couples are aware of the inheritance tax trap ahead of them. Because of this lack of knowledge, many don’t plan for the future appropriately.

Additionally, if you’re non-UK domiciled, check that you don’t automatically become domiciled in the UK because of the 15-tax year test. While it may seem positive at first, your planning options could become more complicated in the future.Are you married to a non-UK domiciled spouse? If so, it’s important that you seek advice from your local accountant in order to avoid paying excess inheritance tax. At N&S, our team of professionals has the knowledge and expertise to identify areas for you to reduce your inheritance tax rate. To find out more about our services and how we can help you, contact us today.