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A client resides overseas, but remains United Kingdom domiciled and, as he intends to return to the United Kingdom, is likely to remain so. He has recently married and his spouse is non-United Kingdom domiciled. My client owns a United Kingdom investment property and wishes to transfer ownership of this property so that he and his wife own it jointly. My first reaction is that this would be inadvisable from a United Kingdom inheritance tax perspective.
A client resides overseas, but remains United Kingdom domiciled and, as he intends to return to the United Kingdom, is likely to remain so. He has recently married and his spouse is non-United Kingdom domiciled. My client owns a United Kingdom investment property and wishes to transfer ownership of this property so that he and his wife own it jointly. My first reaction is that this would be inadvisable from a United Kingdom inheritance tax perspective. Because his wife is non-domiciled, only the first £55,000 of value of the transfer will be exempt, with the rest being a transfer of value. As this increases the value of her estate, it will be a potentially exempt transfer. However, because my client will retain enjoyment of the property by virtue of his joint tenancy, my feeling is that this will be a gift with reservation. Therefore, the whole value will be taxed on his estate if he dies, and her half share will be taxed on her estate, potentially causing double taxation if they were to die together.
Is this a correct reading of the situation? Would tenancy in common provide a solution? Finally is there a way that the spouse's share could be turned into 'excluded property' to take advantage of her non-domiciled status?
(Query T15,869) – Mannin.
'Mannin' has correctly identified the restriction in the inheritance tax spouse exemption but, on the premise that any income from the property will henceforth be shared in the proportion in which the property is owned, the proposed gift will be a potentially exempt transfer and not a gift with reservation of benefit. This would also be the case if the transferor and transferee were not married to each other. In the present case the situation would appear to be explicitly covered by the provisions of section 102B(3)(a), Finance Act 1986 which was one of the sections introduced following the Lady Ingram case (see Ingram and another (Executors of Lady Ingram deceased) v Commissioners of Inland Revenue [1999] STC 37).
In order to turn any of the wife's assets into 'excluded property', it will be necessary effectively to shift their situs outside the United Kingdom. If the wife is likely to remain non-United Kingdom domiciled at general law and not later to be caught by the deeming provisions in section 267, Inheritance Tax Act 1984 by virtue of long fiscal residence, it would be sufficient to transfer her share in the property to an offshore company, the shares in which would be owned by the wife. If the wife might later acquire a domicile within the United Kingdom, either at general law or under the deeming provisions, the shares in the offshore company could be held by the trustees of a settlement since what matters is the domicile of the settlor when the settlement is created in view of the provisions of section 48(3), Inheritance Tax Act 1984. Incidentally, such a settlement does not need to be non-United Kingdom resident to obtain the inheritance tax advantage, although it normally is such because of additional capital gains tax benefits. – Lacuna.
The first point to consider is, what is the exempt transfer to the wife? If it can be shown that the transfer was in consideration of the marriage, then £2,500 relief is available. If, in addition, the annual exemptions have not been used up, a further £6,000 can be added to the £55,000 spouse exemption, so the maximum exempt transfer could be £63,500.
Having established the portion of the property that could be transferred without inheritance tax ever being an issue, it may be possible to exploit the wife's non-domicile status if the husband left the United Kingdom before 16 March 1998.
Firstly the wife creates an offshore settlement with a nominal cash sum. The proportion of the property that represents the maximum exempt transfer is transferred to the wife and the trustees of the settlement then take out an offshore loan to purchase the remaining proportion up to the desired half share. The husband's capital gain is exempt. Prior to them becoming resident in this country, the wife takes out an offshore loan and settles the further cash to repay the trust's loan.
The husband then uses the £3,000 annual exemption and the normal gifts out of income relief to slowly make gifts to the wife so as to repay funds to her equal to the price paid for her share of the property. She will repay the loan firstly from unremitted income and then from capital so that over a period of time the end result is achieved. The husband will own half of the property and the balance is owned by an offshore trust. Even if the wife subsequently becomes deemed domiciled under the '17 out of 20' rule, the trust's property will still be excluded from United Kingdom inheritance tax. – Johnson.
