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Myth 1 – My partner will inherit everything free of UK inheritance tax (IHT) … won’t they?

Many people assume that if they are married or in a civil partnership, UK IHT will not be an issue for them when their partner dies. However, this is not necessarily the case.

Testamentary freedom is the ability to choose who will inherit your estate on death, which everyone can benefit from, but normally requires a valid will to be in place.

What happens if you don’t have a will?

If an individual dies without a will, he/she dies ‘intestate’. In England and Wales, the intestacy rules state that a surviving spouse or civil partner benefits from £250,000 absolutely, and a life interest in half of the residual estate (assuming the couple have children). This is also particularly important for unmarried couples, as without a will, the surviving partner will not automatically inherit the full value of the deceased’s estate. Please note that the rules surrounding intestacy vary from country to country.

Domicile can impact how you’re taxed

Whilst inter-spouse transfers are generally considered free of IHT, if the receiving spouse is a non-UK domicile, they are limited to the nil rate band of the deceased (currently £325,000), plus an additional, limited inter-spouse exemption of £325,000. This means that anything in excess of £650,000 will be subject to IHT at 40%.

It’s also worth noting that if the recipient has a UK located asset for legal purposes, or they become UK domiciled later, a further 40% IHT may be payable upon death, on the value already taxed.

Let’s look at an example:

Sally and Peter are married with children – Sally is a UK domicile and Peter is a non-UK domicile.  Sally’s will passes 100% of her £950,000 estate to her husband. But when she dies suddenly and her estate is transferred to Peter, as a non-UK domicile, everything over £650,000 becomes subject to IHT.

Peter moves on with his life and after a few years acquires a UK domicile. However, he doesn’t realise that when he dies some years later, and his estate is passed to his children, that the value of his estate over £325,000 will also be subject to IHT at 40%.

So the estate will effectively have been taxed twice.

Although, since 2013 a non UK-domiciled spouse can elect to be treated as a UK domicile for IHT purposes, there are traps, as well as opportunities in this course of action that require careful consideration.

Given the complexity of domicile and the implications for IHT, people would be wise to carefully consider their financial position and be aware of the potential IHT tax implications and how they can be mitigated.

Speak to your AAM Wealth Manager or email [email protected] for help navigating this complex area.

Look out for Myth 2 of the series in December’s edition.- “The residence nil rate band heralds a £1m UK IHT allowance for all.”



This article is for information purposes only. The views expressed in this document are those of our sister company, Old Mutual International and are subject to change without notice.