Student column

  • Author : Amanda Edwards
  • Date : January 2009
Amanda Edwards TEP is a Solicitor with Boodle Hatfield

T he spouse/civil partner exemption under section 18 Inheritance Tax Act 1984 is one of the most valuable inheritance tax (IHT) reliefs available. The amount of the relief is unlimited except where a UK domiciled spouse/civil partner leaves assets to a non-UK domiciled spouse/civil partner. In those circumstances, the spouse/civil partner exemption from IHT is restricted to a value of GBP55,000 (Section 18(2)).

The rationale behind this restriction (which is also the key to remembering when it applies) is to prevent a UK domiciled spouse/civil partner from transferring (or facilitating the transfer) of assets worth more than GBP55,000 outside the UK IHT net, without suffering an IHT charge in doing so. This might happen because the assets, once in the hands of the non-UK domiciled spouse/civil partner, could (if the assets are non-UK situs) be gifted again, without making any transfer of value for IHT purposes. If the assets are UK situs at the time of the initial transfer, they could be converted by the transferee spouse/civil partner into non-UK situs assets. ‘Domiciled’ in this context has its extended meaning in section 267, so that includes persons treated as domiciled in the UK under the deemed domicile provisions.

The rule does not apply where spouses/civil partners have matching domicile status, whether both are UK domiciled or both are non-UK domiciled. In either case the full spouse/civil partner exemption under section 18(1) is available.

Further points to bear in mind are:

  • The GBP55,000 limit can be quickly exhausted – where it applies, gifts are set against it first and these never fall out of account, even after seven years. This is in contrast to the potentially exempt transfer (PET) regime under Section 3A whereby PETs fall out of account provided the donor survives seven years.
  • If a UK domiciled spouse/civil partner uses up the GBP55,000 exemption with gifts to a non-UK domiciled spouse, he or she will still have any available nil rate band (GBP312,000 for 2008/09) as a means of making further gifts, assuming no other substantial lifetime gifts.
  • The total value available to an individual UK domiciliary to pass to a non-UK domiciled spouse/civil partner free of IHT is therefore GBP367,000 in 2008/09, comprising the limited spouse/civil partner exemption and the current nil-rate band.
  • Where the GBP55,000 limit applies and is exceeded, a transfer of value may be a gift with reservation (GWR) under FA 1986 section 102(1), (2). Most gifts between spouses/civil partners are excluded from IHT under the GWR rules, but only so far as the spouse/civil partner exemption applies.
Example 1

In 1999, Mrs White, who was domiciled at all times in the UK, transferred GBP200,000 to Mr White, who was not domiciled in the UK. Of this transfer, GBP55,000 is exempt under section 18(2) and the remaining GBP145,000 is a potentially exempt transfer (within Section 3A) (ignoring the availability of other IHT reliefs, for simplicity). Mrs White dies in 2008 without making any further gifts, leaving all her property to Mr White, who remains domiciled outside the UK. Even though Mrs White has survived for seven years after making the 1999 transfer, the limited GBP55,000 exemption under section 18(2) has all been used and is not available on her death. However, her nil rate band is again fully available to set against the transfer on death, seven years having passed since the transfer of the GBP145,000 ‘excess’ over the GBP55,000 spouse exemption.

One further point to look out for is where transfers of value are exempt under section 18(1) because the spouses/civil partners have a matching domicile status at the time, but the domicile status of one of them later changes. The earlier transfers of value do not become chargeable but are set against the GBP55,000 limit in section 18(2) because the limit is ‘less any amount previously taken into account for the purposes of the exemption conferred by this section’.

Statutory references are to the Inheritance Tax Act 1984 unless otherwise stated


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