Spouse Exemption: Limitation for Non-UK Domiciled Transferees

Matthew Hutton MA, CTA (fellow), AIIT, TEP highlights some practical issues relating to the Inheritance Tax spouse exemption in IHTA 1984, s 18.

Introduction

The £55,000 threshold in IHTA 1984 s 18(2) cannot be recycled.  That is, even if the transferor survives the gift by seven years (so otherwise making a PET exempt), IHTA 1984 s 3A does not help as the gift would not otherwise be ‘a chargeable transfer’ as required by IHTA 1984 s 3A(1A)(b).

(Trust Discussion Forum 19.8.08, posting by Jon Zigmond of PWC Leeds)

Separately, if the transferee is domiciled in an EU Member State, there must be strong arguments that IHTA 1984 s 18(2) is contrary to the EC Treaty.  And it is perhaps surprising that the point has not yet been taken to the ECJ.

Comment

While, once a UK domiciled spouse had used up his £55,000 exemption in transfers to his non-UK domiciled spouse, any excess would presumably be a PET, ie exempt on survival for seven years.

If one were able to show that either of IHTA 1984 s 10 (transfers with no gratuitous intent), somewhat improbably, or IHTA 1984 s 11 (dispositions for maintenance of family) applied, one would not be bound by the £55,000 restriction.  In particular both those sections prevented a particular disposition from being a transfer of value in the first place.

Domicile rulings

There seems to be a general view that it has become more difficult to get a DOM 1 ruling from HMRC.  The standard response of HMRC to a DOM 1 request has been that they would not give a ruling if the issue could be the matter of a self assessment, when HMRC would have an opportunity to raise an enquiry in the normal course – though this is not something of which they seem to be taking great advantage.  Only if the case is not within self assessment will HMRC now give a ruling – and then only if a UK tax issue hangs on it.  Any ruling in such a case, that is before any tax returns were submitted for the individual, tends to be highly qualified.

Certainly, the general experience is that it is not often that HMRC would challenge a claim to non-UK domicile.  It is generally thought that the recent changes to the domicile questions on the SA Form represented effectively an intelligence-gathering exercise.  That is, in cases where the individual had been born within the UK and/or had been resident here for more than 20 years and was claiming to be non-UK domiciled, such information would be used to put together some statistics which might prompt specific enquiries.

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Article Added Saturday, 29 November 2008

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