My partner is Non Domiciled – how best can I carry out Estate Planning for IHT?
Trust planning is just as relevant for clients who may be a mix of UK domiciled and non-UK domiciled as the bloodline protection and tax planning priorities remain the same. The key difference however may be dictated in the relevant magnitude of the assets owned by each partner.
A transfer of UK assets between legal partners is exempt from inheritance tax and every person, UK domiciled or not, is entitled to the full nil rate band to be set against their estate that is subject to IHT. If a non-UK domiciled partner transfers assets to their UK domiciled partner, a full spousal exemption also applies because such a transfer brings assets within the UK inheritance tax net. Greater consideration needs to take place when assets flow in the opposite direction, where assets may leave the UK inheritance tax regime.
This year there were some welcome changes to transfers to non-UK domiciled partners and although not unlimited the change effective from 5 April 2013 allows a UK domiciled partner to transfer the equivalent of the nil rate band (currently £325,000) to their partner. This allowance is in addition to their nil rate band which means a total of £650,000 may be gifted. This change is welcomed and for families of modest wealth most mixed domiciled partners will pay less IHT.
For wealthier clients, the tax position is not significantly different, although there will be more tax planning flexibility. Whereas the transfers to a domiciled partner are unlimited, transfers from a UK domiciled partner above £650,000 may be taxed at 40% and the residue will fall into the surviving partner’s estate. It is for these clients that more careful planning can be undertaken and the use of Trusts is particularly effective.
A further new benefit for non-UK domiciled spouses is the ability to elect to be treated as UK domiciled for IHT. The benefit is dependent on a number of factors including overall estate values, location of assets and future intentions however this additional planning option is welcomed for clients.
The tax treatment of mixed domiciled couples has been improved, but effective estate planning is not just about tax. Bloodline protection of assets can be even more important and the use of trusts is as relevant for non-UK domiciled clients as it is for UK domiciled clients. The use of trusts for main property assets and the residual estate is particularly important but needs to be implemented with even more consideration for mixed domiciled couples.
HMRC Simplification of IHT Trust Taxation
The consultation period for the simplification of trust taxation has now passed and what is clear is there are some severe reservations on aspects of the proposals from both legal and financial bodies. The proposals will simplify some aspects of planning but will create their own complexities and the general conclusion is that HMRC will broadly implement their ideas regardless because of the beneficial tax impact. We believe that need to rethink aspects of the proposals which currently will create conflicts between trust and tax laws. We hope these will be more intelligently considered prior to the expected announcements in the Autumn statement.
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