■ £325,000 passes to Francesca under the increased spousal exemption.
■ The remaining £675,000 is chargeable to IHT.
■ £325,000 is within Peter’s available nil-rate band.
■ This leaves £350,000 taxed at 40 per cent and a £140,000 IHT bill.
■ Francesca will inherit Peter’s net estate of £860,000.
Francesca could, up to two years after Peter’s death, elect to be treated as UK domiciled for IHT. This would mean Peter’s entire estate would pass free of IHT. And, as Peter has no longer used his nil-rate band, it would become available to Francesca under the transferable nil-rate band rules.
But there could be a sting in the tail. By electing to be treated as UK domicile means IHT is no longer restricted to Francesca’s UK assets. She will now be taxed on her worldwide assets. If she returns to Spain she would remain subject to UK IHT on all her assets for three complete tax years after leaving the UK.
Discrimination will still exist where a limit only applies to non-doms. It remains to be seen whether the ability to make an election for equal treatment will pacify the EU or whether they will insist that it applies automatically. The proposals in the Finance Bill provide the best of both worlds: an increased exemption with only IHT charged on UK assets, or an unlimited exemption but with IHT charged on everything. And there is a two-year “wait and see” period.
But by trying to address inequality the EU could remove choice and inadvertently speed up the deemed domicile process. Precisely what many non-doms with assets abroad would be keen to avoid. We await the EU reaction with interest.
Dave Downie is technical manager of Standard Life
Key points
■ IHT for non-dom spouses has come under fire from the EU, prompting changes.
■ Gifts between spouses are normally totally exempt from IHT, but this does not apply where the gift is from a UK domiciled individual to their non-domiciled husband or wife.
■ Discrimination will still exist where a limit only applies to non-doms.
