Some countries offer generous tax exemptions for spouses (and civil partners) who makes gifts to each other during lifetime or on death. However, where the married couple (references to marriage are also to include civil partnerships) are domiciled in different countries, the tax position of such gifts can be very different.
In this insight article, we consider the UK IHT consequences of gifts between a UK domiciled and USA domiciled spouse. A full understanding of the UK tax consequences of gifting between these spouses is important where the couple own assets in both countries.
Domicile is a legal concept. Detailed legal advice should be taken where there is any doubt about a person's domicile. A helpful summary of domicile can be found here.
Matching domiciles
As a starting point, it is helpful to understand how married couples with the same domicile are subject to UK inheritance tax ("IHT").
- Mr and Mrs UK (both UK domiciled) can make unlimited gifts to each other without UK IHT becoming due, even if the donor dies within 7 years of making the gift. They can also pass unlimited amounts to each other on death without the transfer being subject to UK IHT.
- Similarly, Mr and Mrs USA (both domiciled in the US) can make unlimited gifts to each other or transfer funds on death without UK IHT being incurred, albeit there may be estate tax or gift tax consequences in the USA. The overall position may also be different depending on whether Mrs USA is resident (a legal concept which is different from domicile) in the USA or another country.
Different domiciles
The position, however, is a bit more complex where a married couple have different domiciles.
Gifts by Mrs USA to Mr UK
Any gifts by Mrs USA to Mr UK benefit from the unlimited spouse exemption and will not, therefore, be subject to UK IHT. Mrs USA may, however, find that there are tax consequences in the USA.
Gifts by Mr UK to Mrs USA
Under the UK tax system, gifts (during lifetime and on death) from a UK domiciled spouse to a non-UK domiciled spouse do not benefit from an unlimited spouse exemption. Instead, the spouse exemption is capped at £325,000. This is a lifetime limit that is not refreshed.
This is to be compared with the nil rate band ("NRB") – a further IHT-threshold that every individual has of £325,000 (in addition to the spouse exemption). If lifetime gifts are made, then provided the donor survives 7 years from the date of the gift and retains no benefit in the gifted asset, the value of the gift will fall out of account for IHT purposes. In essence, the NRB will essentially "refresh" every 7 years. Any unused NRB from the first death can also be transferred to a surviving spouse – this is known as the 'transferable nil rate band' ("TNRB").
In addition to the NRB, the IHT residence nil rate band ("RNRB") may also be available in certain circumstances, providing an additional £175,000. Like the NRB, this can also be transferred between spouses ("TRNRB").
In summary, whilst the unlimited spouse exemption would not apply on transfers from Mr UK to Mrs US, then (depending on the structure of any will, whether lifetime gifts have been made and the order of death) the following UK IHT allowances may still be available:-
- £325,000 capped spouse exemption;
- £325,000 NRB;
- £325,000 TNRB;
- £175,000 RNRB; and
- £175,000 TRNRB.
UK IHT would be paid at 40% on the value over the available reliefs and exemption.
The rationale
Although the tax position seems a bit complex, the rationale becomes clearer when you consider the UK Government's opportunity to tax the funds.
- Where Mrs UK gifts to Mr UK, the combined estate will be subject to UK IHT on the second death (over the value of reliefs and exemptions).
- Similarly, where Mrs USA gifts to Mr UK, assets are being brought into the UK tax net and will be subject to UK IHT if they are held by Mr UK on death.
- By contrast, where Mr UK gifts to Mrs USA, the UK Government loses the opportunity to tax the funds on the second death (because Mrs USA is not subject to UK IHT on her death). Therefore, when Mr UK gifts to Mrs USA, the UK tax system caps the value of the gift which can be made IHT-free if Mr UK dies within 7 years of making the gift.
Married couples who have connections with the UK and the US will always benefit from taking bespoke advice in both jurisdictions before any significant gifts are made. Even where tax is not due, there may still be reporting requirements. If you have any questions, please get in touch with your usual Brodies contact.
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