Inheritance Tax exemptions for non-domiciled spouses or civil partners

For inheritance tax, one of the most valuable exemptions available is the spouse or civil partnership exemption. Provided both spouse’s domicile is the same,  the amount of the exemption is generally unlimited. The exemption also applies to lifetime gifting between spouses.

However, in cases where the deceased is UK domiciled but their spouse is domiciled abroad, the amount of spouse or civil partnership exemption is limited to £325,000 (up from the previously much lower limit of £55,000). This exemption is slightly unusual as it is a lifetime allowance. It does not refresh and any gifting to a non-domiciled spouse in the deceased’s lifetime will use up part of the allowance. The usual seven year time window for a gift to be considered as exempt does not apply and any lifetime gifts will use up part of the allowance.

The above spouse allowance is in addition to the general nil rate band of £325,000.

We recently acted in relation to an estate of this nature – specifically the deceased being UK domiciled but the surviving spouse being Swedish domiciled. The whole estate was passing to the surviving spouse but far exceeded the £650,000 of available limits. This resulted in the estate becoming exposed to inheritance tax and the spouse needing to find available assets to settle the bill.

The non-domiciled spouse can choose to make an election to be treated as UK domiciled for inheritance tax purposes. This would allow them to benefit from the unlimited spouse or civil partner exemption.

We assisted the surviving spouse and advised her in relation to the advantages and disadvantages of making the election.  On this occasion, it was decided to proceed with the election, immediately extinguishing the inheritance tax charge. The decision on whether to proceed should be considered carefully and on a case by case basis – although in many cases it will immediately remove the inheritance tax charge on the death of the first-spouse it does bring the surviving spouse’s worldwide estate into the UK inheritance tax net for generally at least four years, or potentially longer, depending on each set of circumstances. Before the budget on 30 October 2024 this was generally for at least four years, although potentially longer dependent on the circumstances. Following the budget, the option to be treated as a “long-term resident” exists from 6 April 2025, but this will bring the surviving spouse’s estate into the UK inheritance tax net for a much longer period of at least 10 years.