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 connected to different countries, the tax position of such gifts can be very different.
In this insight article, we consider the UK Inheritance Tax ("IHT") consequences of gifts between a UK domiciled and USA domiciled spouse under existing rules and those intended to take effect from 6 April 2025 following the enactment of the Finance Bill 2025. 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 and has historically been important to understand one's liability to IHT. From 6 April 2025, domicile will be replaced by residence as the factor that determines liability to IHT.
Matching connections
As a starting point, it is helpful to understand how married couples with the same domicile are, under existing rules, subject to 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. From 6 April 2025, where Mr and Mrs UK are both Long-Term Resident in the UK, they will continue to benefit from the spousal exemption from IHT.
- Similarly, Mr and Mrs USA (both domiciled in the US) can make unlimited gifts (including of UK property) 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. Again, following the passage of the Finance Bill 2025, where Mr and Mrs USA are not Long-Term Resident in the UK, transfers between them will remain exempt from IHT. 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 connections
The position, however, is a bit more complex where a married couple have different connections to different countries.
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 IHT and this will not be altered by the passage of the Finance Bill 2025 into law. Mrs USA may, however, find that there are tax consequences in the USA.
Gifts by Mr UK to Mrs USA
Under the current 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 currently capped at £325,000. This is a lifetime limit that is not refreshed however long the gap between gifts.
This is to be compared with the nil rate band ("NRB") – a further IHT-threshold that every individual has of, currently, £325,000 (the same amount, but 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 from 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 (to be used on their death) – 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 IHT allowances may still be available:-
- £325,000 capped spouse exemption;
- £325,000 NRB;
- £325,000 TNRB;
- £175,000 RNRB; and
- £175,000 TRNRB.
IHT would be paid at 40% on the value over the available reliefs and exemption.
The Finance Bill 2025, when enacted, will not disturb the current treatment of gifts by Mr UK to Mrs USA: the aforementioned reliefs will remain available for use. Gifts will simply be made by Mr UK (a Long Term Resident spouse) to Mrs USA (a spouse that is not a Long Term Resident).
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 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 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, other than on UK assets). 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.
Brodies' wills and estate planning experts can advise on Scottish matters, as well as English wills and probate. Our personal law team is highly experienced in working with individuals who have connections in the US and UK. To speak with a member of our team, please get in touch.
