A colleague has a UK dom client with a wife born in a Muslim country – Turkey as it happens, but nothing rides on that. I am asked whether there is anything to stop the client giving all assets legally to his wife and just living 7 years to avoid UK IHT? As he would arguably need these assets to fund his life could HMRC challenge him as the gift being ineffective for IHT purposes. Any self deprivation rules or gift with reservation rules likely to be broken here? Tax in Turkey is apparently only 10% so he would prefer for her to have the assets and pay the tax on death there?
I’ve commented as below
Ignore the self deprivation rules – they apply only to care home fees.
On the IHT front, with one proviso, not sure I see a problem. There is no legal obligation for him to retain sufficient funds to support himself for the rest of his days – lots of pensioners in poverty in the UK might say that in hindsight they haven’t done so. He has no legal right to reclaim the money save only that if we were looking at UK law, the starting point on divorce is that the marital assets get divided 50-50. Even so, that is operation of law rather than him choosing to reserve a benefit so I would be very surprised if the point was taken.
Clearly, you’ll have to hedge this round with risk warnings, even though it’s his idea and not yours. By way of example, he could not restrain his wife from spending the money unwisely, or gifting it away from him. Whilst I stated what UK divorce law is, above, I don’t know what divorce laws would apply in Turkey or in the country of residence, or even what the rules are as to which countries they can start a divorce process in. As an aside to my professional reading, I understand that sometimes it can be a ‘who files first’ matter so if he wants to understand that, he will need to take local advice. We can’t help with that
What do they intend if he dies before her – if the assets return to him, he is no better off. A trust might help, but I doubt Turkey does trusts. Any risk Dubai would claim that she should be subject to Dubai law and tax – if they introduce an inheritance tax, that is
IHT: Spouse exemption for transfers from UK dom spouse to non-UK dom limited to currently £325,000 :s18(2) IHTA 1984
Lifetime exemption and regardless of how many non-dom spouses are involved in transfers during that lifetime!
CGT: Husband to wife transfer not a disposal so no gain/loss. Domicile and residence of transferee spouse not relevant provided living together and not separated
CG22300 “There is no longer any authority to treat a non-resident spouse as separated from a resident spouse merely because of their residence status. Similarly a non-resident civil partner may not be treated as separated from a resident civil partner merely because of their residence status.”
I presume you mean if she dies before him in the last paragraph? If he dies first then provided he has survived 7 years according to your theory there is no problem, he has no meaningful Estate. Does she have a Will that leaves everything to him or is this Sharia that would revert everything back to him? If she does have a Will then presumably it should leave everything to her children (if any?) or is a Will overruled by Sharia?
Also is there not a possible danger of GROB or POAT if she continues to maintain him with assets that derived from him originally. Does he have ongoing regular income with which to maintain himself and his family?
Maxine Higgins
Maxine, we are in early conversations, and I have been asked for guidance by a colleague elsewhere in the business, so I lack detail, but the sharia point is one we ought to keep in view, in that she may have little choice in the matter. I’ve assumed that in retirement there is no substantial income, but can’t be certain.
I can’t see how GROB will arise, because he isn’t reserving anything, but the fact I’m asking tells you I feel I am on shaky ground. Even POAT, which I tend to feel is a “second stage” trap to catch those who get past the GROB rules doesn’t seem likely to me. It is not land, chattels or an insurance policy, so it can only be the income tax charge on intangibles, but as it is not in trust, seems to me it is not caught.
My understanding is that if H died within 7 years of making the gift to W, W could elect under the provisions of the Finance Act 2013 to be treated as UK domiciled for IHT purposes.This election would have to be made within two years of H’s death and would ensure that the full spouse exemption would available for H’s estate, meaning that no IHT would be payable. For the election to remain effective, the provisions require W to become UK resident for income tax purposes for a period of four successive tax years. This can begin at any time after the election is made; otherwise the election automatically ceases to have effect at the end of that period. I do of course stand to be corrected, which would be embarrassing!
During the four years after the election the wife will be exposed to IHT on worldwide assets even though non-resident and hoping to eventually benefit from the election ceasing to apply.
There is no information provided as to the residence status of H or W or the size of the gifts being proposed. It seems W may be a Turkish national albeit resident in Dubai who was born in Turkey. If W was born legitimately with a Turkish domiciled father but later moved to the UAE then from the UK perspective she may have acquired a UAE domicile of choice. Note that a marriage pre 1 January 1974 would cause W to have acquired a UK domicile of dependence (assuming H possessed at that time a UK domicile); this status could change subsequently.
There is no bar to H gifting (If appropriate) all his assets, UK and non-UK situs, to W.
Turkey is a secular country and Sharia law would not apply.
The health of each spouse could determine the optimum action to take in particular if combined with planning for childre. For example, is it highly likely the donor (H) will survive for the 7 years post gift. Arguably, even if not, taper relief could produce an IHT charge less than it would be on death.
The gift with reservation rules could be in point if H somehow enjoys benefit from the assets gifted. What proportion of H’s worldwide assets are to be gifted?
CGT is not an issue unless H and W are either not married or are not living together (living together does not require the same residence status for H and W).
The UK has income tax DTAs with both Turkey and UAE but no IHT DTA.
An election by W for UK domicile status should be approached with caution not least of which is that once made it is irrevocable. The election may be a lifetime or death election with in many cases the latter being the better option.
Whilst a death election following H’s death would allow H’s estate benefit of the spouse exemption it would drag W’s estate (which would now include H’s asset transfers) into the IHT net on her death if this occurred within a period of 4 successive years commencing at anytime after the election was made. If W has significant non-UK situs assets and if she is either not very healthy and/or of advanced years this may prove to be a disastrous option.
As might be inferred from other replies, there could be a ‘reservation of benefit’ issue if, as is assumed, W is non-UK domiciled and H is UK domiciled. S.102(3) doesn’t apply in the circumstances mentioned in S.102(5), which include exemption under S.18 IHTA 1984. But this only applies to gifts of £325,000 less any amount previously exempted by S.18 (in the transferor’s lifetime). Any excess would remain vulnerable to attack. If H has been generous to his wife in the past, (or to a previous wife!) that £325,000 might have been wiped out.
