Inheritance Tax (IHT)

Published: Wednesday 21 March 2012

Changes to the spouse exemption where one spouse is not domiciled in the UK

HM Revenue & Customs (HMRC) have at long last proposed updating the position regarding differently domiciled spouses.  There will be consultation on this, but if this is implemented, it will bring the exemption limit up to date.  For couples, where their estates are not large, the proposed changes will enable them to simplify their affairs.

Where both spouses are domiciled in the UK, transfers between them are usually exempt from IHT, but transfers from a UK domiciled spouse to a non-domiciled spouse have until now only been exempt up to £55,000  That figure hasn’t changed since IHT was introduced in 1984. 

The proposal is for non UK domiciled spouses to be able to elect to be treated as UK domiciled for IHT purposes which would mean unlimited IHT exempt transfers between spouses.  If they do not make an election, the exemption will be increased to the Nil Rate Band, which is currently £325,000.

Changes to IHT charges in trusts

The Government will be consulting on changes to the way that trusts, which are subject to IHT, are taxed on their 10 year anniversaries and when property is transferred out of the trust. At present, the calculations are unwieldy and complex, and anyone who is not a specialist finds the calculations extremely difficult. Any simplification here will be welcome.

Anti-avoidance measures

There is a proposal to close a tax avoidance scheme where UK domiciled individuals could avoid IHT by purchasing an interest in an offshore trust.  HMRC have attempted to close this scheme twice before, so we will have to wait to see the draft legislation before we can comment as to whether this scheme will finally close.

Update on previous announcements

The Nil Rate Band remains frozen at £325,000 until 2015.  Thereafter it is intended that it will rise in line with the Consumer Price Index (CPI).

For deaths on or after 6 April 2012, there will be a reduced rate of tax of 36% where the deceased has left 10% or more of their net estate to a charity.