Failed PET to non-dom spouse

A UK-domiciled person gives cash to their non-domiciled spouse, and then dies within 7 years. The deceased’s will divides the estate between their spouse and their children. The total of the gift and the spouse’s share of residue exceeds £325,000, and the estate as a whole exceeds £650,000. No election is made by the spouse within 2 years of the death to be treated as UK-domiciled for IHT.

Does the gift to the spouse reduce the NRB of £325k, or the non-dom spouse-exempt limit of £325k? I’m assuming the latter, and the NRB is preserved and applied to the estate, shared rateably across the children’s share of residue and and the non-exempt balance of the spouse’s share.

I’d be grateful for any guidance on this!

Alexander Learmonth QC

My understanding is that the spouse allowance is set against the spouse’s entitlement, and it is only the net entitlement that is brought into account for IHT.

However, I also understand that s.18(2) is not limited to the 7 years immediately preceding the death of the spouse with a UK domicile, but is a lifetime allowance. Accordingly, if the deceased gave the surviving spouse, say, £100,000 20 years ago, that would need to be taken into account when ascertaining the extent to which relief under s.18(2) is now available, or even if IHT is payable on what might otherwise have been a failed PET.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

I agree with your view, Alexander.

I would add, as Paul mentions, that the current £325k spouse exemption is a lifetime allowance. In particular, earlier transfers to any former non-domiciled spouse are taken into account not just transfers to the current surviving spouse.

The provisions of the UK’s IHT double tax agreements may affect the amount of the spouse exemption; haven’t checked, but from memory the agreements with Switzerland and USA may be relevant.

Malcolm Finney

Thank you both!