Case Study : British expatriate and a non-UK domiciled spouse
John (UK domiciled) and Miki (Japan-domiciled) are resident in Japan. They have 2 children and intend to retire in the UK in 6 years. They jointly own a UK property worth £500,000, and John has assets in his name worth £700,000. Miki has assets in her name worth £400,000.
Assuming all assets other than the property are non-UK assets, the UK inheritance tax (IHT) position on John’s death would be as follows:-
Half share in house: £250,000
Other assets: £700,000
Spouse exemption: £325,000
Nil rate band: £325,000
IHT liability @ 40% £120,000
John could transfer some of his assets to Miki to take advantage of her non-UK domiciled status. However, by doing so, he will deplete the spousal exemption, and it will take 7 years for any excess above the spousal exemption to fall out of John’s estate. Instead, Miki makes an election to be UK domiciled on 1st November 2016, and John gifts £400,000 to her on 20th December 2016.
The transfer from John is an exempt transfer, and the remainder of his estate can pass to Miki free of IHT if he dies within the next 4 years. Assuming they do not take up residence in the UK in the meantime, Miki will become non-UK domiciled again on 6th April 2021. If John dies after that date, his estate left to Miki will be free of IHT as it falls below the (intact) spousal exemption and the nil rate band.
After 6th April 2021, in contemplation of their move to the UK, Miki creates an excluded property trust. This will ensure that, should she become deemed domiciled for IHT purposes in the future, the assets in the trust would be outside her estate for IHT.
Assuming John predeceases Miki, a potential IHT liability remains on Miki’s death in respect of the family home in the UK (£500,000 – £325,000) x 40% = £70,000). This liability could be covered by effecting a life insurance policy in trust.