Non-Dom Spouse Election IHT UK (2026): How a Non-Domiciled Surviving Spouse Can Elect for the Unlimited Spousal Exemption

UK inheritance tax imposes different spousal exemption limits depending on the domicile status of the surviving spouse: (1) THE UNLIMITED EXEMPTION — UK-DOMICILED SURVIVING SPOUSE: under IHTA 1984 s.18(1), assets passing on death to a surviving spouse or civil partner who is UK-domiciled (or treated as UK-domiciled under IHTA 1984 s.267) are ENTIRELY exempt from IHT. There is no upper limit. A UK-domiciled person can leave their entire estate — however large — to a UK-domiciled spouse or civil partner with nil IHT; (2) THE LIMITED EXEMPTION — NON-UK-DOMICILED SURVIVING SPOUSE: where the surviving spouse or civil partner is NOT UK-domiciled (and is not treated as UK-domiciled under s.267), IHTA 1984 s.18(2) caps the spousal exemption at £325,000 (the NRB amount — the cap has been frozen at this level in line with the NRB). This means that if a UK-domiciled person dies and leaves, say, £1,000,000 to a non-domiciled spouse, the first £325,000 is exempt and the remaining £675,000 is subject to IHT at 40% (i.e. £270,000 IHT). The IHT is paid from the estate before distribution; (3) WHY THE LIMIT EXISTS: the rationale is that assets passing to a non-domiciled surviving spouse may later pass out of the UK IHT regime entirely — if the non-domiciled spouse later dies while domiciled abroad, their non-UK estate (including what they inherited from the UK-domiciled spouse) may be outside UK IHT. The unlimited spousal exemption is designed for wealth that will ultimately be subject to UK IHT; (4) WHO IS AFFECTED: this issue most commonly arises for: (a) UK nationals married to foreign nationals who have retained their non-UK domicile; (b) international couples where one spouse has lived in the UK for many years but has not acquired UK domicile of choice; (c) expatriate UK nationals who have acquired a domicile of choice abroad and whose spouse has remained outside the UK IHT net; (5) THE DISTINCTION FROM DEEMED DOMICILE (s.267): a separate provision — s.267 — treats certain long-term UK residents as UK-domiciled for IHT (the '15 out of 20 tax years' rule, now amended to 10 years after April 2025). A person who has been a UK tax resident for 10+ years may be deemed UK-domiciled under s.267 and the unlimited exemption applies to their estate.

IHTA 1984 s.267ZA (inserted by Finance Act 2013) gives a non-domiciled surviving spouse the ability to elect to be treated as UK-domiciled for IHT purposes: (1) WHAT THE ELECTION DOES: by making the s.267ZA election, a non-domiciled surviving spouse elects to be treated as if they were UK-domiciled at the time of the transferor spouse's death (and continuing). The effect is: (a) the full unlimited spousal exemption under s.18(1) applies to assets passing from the deceased UK-domiciled spouse to the electing surviving spouse — eliminating the £325,000 cap; (b) the electing surviving spouse's worldwide estate is then subject to UK IHT when they later die (because they are treated as UK-domiciled); (2) THE MECHANISM: the election is made by the surviving spouse (or their personal representatives if they have already died) by written notice to HMRC. The election is irrevocable once made; (3) DURATION — THE COMMITMENT PERIOD: the election is not permanent. Under s.267ZA(4), the election applies for a period of: (a) the remainder of the surviving spouse's lifetime; (b) or, if they marry/form a civil partnership again or change their actual domicile to UK, the relevant period ends. In practice, the election means the surviving spouse is treated as UK-domiciled for IHT for the rest of their life — and their worldwide estate on death will be subject to UK IHT; (4) THE ELECTION AND IHT ON SECOND DEATH: the most important consequence of the election is that when the surviving spouse dies, their entire worldwide estate (not just their UK assets) will be subject to UK IHT at 40% (subject to NRB and RNRB). A non-domiciled surviving spouse who has a large foreign estate should carefully weigh: (a) the IHT saved on the first death by using the unlimited spousal exemption; versus (b) the additional IHT payable on the second death on the worldwide estate; (5) MAKING THE ELECTION: the election is made by writing to HMRC Trusts, Settlements and Estates. The election must be made within 2 years of the transferor's death (or within 2 years of the election trigger — typically the inheritance).

The decision to make the s.267ZA election requires careful analysis of both the immediate IHT saving and the long-term cost: (1) THE CALCULATION — FIRST DEATH SAVING: the election saves IHT at the first death on the amount transferred to the surviving spouse that exceeds the £325,000 limited spousal exemption. Example: UK-domiciled husband (H) dies with £2,000,000 estate; non-domiciled wife (W) inherits £2,000,000. Without election: £2,000,000 - £325,000 = £1,675,000 × 40% = £670,000 IHT. With election: £2,000,000 × 0% = nil IHT (unlimited spousal exemption). Immediate saving: £670,000; (2) THE CALCULATION — SECOND DEATH COST: when W later dies with an estate of £3,000,000 (the original £2,000,000 + her own non-UK assets of £1,000,000). Without election (if W remained non-domiciled): only UK situs assets subject to UK IHT. With election: entire worldwide £3,000,000 estate subject to UK IHT. Additional IHT: (£3,000,000 - £325,000 - £325,000 RNRB) × 40% = approximately £947,000. Net benefit of election: saving of £670,000 at first death minus additional £947,000 at second death = NET COST of £277,000. In this scenario, the election is NOT worth making; (3) WHEN THE ELECTION IS WORTH MAKING: the election is most clearly beneficial when: (a) the surviving spouse has little or no non-UK assets (so the second death IHT cost is modest); (b) the surviving spouse is likely to die soon after the first spouse (reducing the period of ongoing UK IHT exposure); (c) the surviving spouse acquires UK domicile during their lifetime anyway (in which case the election adds nothing to their IHT position); (d) the non-UK assets will be consumed during the survivor's lifetime (reducing the estate at second death); (4) WHEN THE ELECTION IS NOT WORTH MAKING: the election is unlikely to be beneficial when: (a) the surviving spouse has substantial non-UK assets that would otherwise be outside UK IHT; (b) the surviving spouse is young and likely to outlive the UK-domiciled spouse by many decades; (c) the surviving spouse plans to return to their country of origin after the UK-domiciled spouse's death; (5) THE TWO-YEAR DEADLINE: the election must be made within 2 years of the death. Specialist advice should be taken promptly.

The IHT position of a non-domiciled individual is fundamentally different from a UK-domiciled person — and requires distinct planning: (1) EXCLUDED PROPERTY — IHTA 1984 s.6: a non-UK-domiciled individual's non-UK situs assets are 'excluded property' for IHT. They are entirely outside the UK IHT charge. This means: (a) a non-domiciled person's foreign bank accounts, overseas property, and non-UK investments are not subject to UK IHT; (b) only UK situs assets (UK property, UK bank accounts, UK investments, shares in UK companies) are within the scope of UK IHT for a non-domiciled person; (2) THE UK RESIDENTIAL PROPERTY TRAP — POST-2017: Finance Act 2017 removed the excluded property status of UK residential property held indirectly through an offshore company or trust. Since April 2017: (a) UK residential property held via an offshore company, partnership, or trust is within the UK IHT charge even for non-domiciled persons; (b) the 'enveloped' UK residential property is treated as UK situs for IHT; (c) this catches many non-domiciled individuals who hold UK property through Jersey, BVI, or Cayman structures; (3) DEEMED DOMICILE — s.267 (FROM APRIL 2025): from April 2025 (post the Autumn Budget 2024 changes), a person is treated as UK-domiciled for IHT if they have been UK tax resident for 10 out of the last 20 years (previously it was 15 out of 20 years). This significantly broadens the scope of UK IHT for long-term UK residents who are technically non-domiciled; (4) PLANNING STRATEGIES FOR NON-DOMS: common planning strategies include: (a) gifting non-UK assets as PETs — surviving 7 years removes them from the estate; (b) using excluded property trusts (trusts settled with non-UK situs assets while the settlor is non-UK-domiciled) — these can preserve excluded property status even after the settlor becomes deemed UK-domiciled; (c) reviewing the timing of any election to treat the surviving spouse as UK-domiciled; (d) ensuring UK property is not held through offshore structures (the 2017 changes eliminate this planning); (5) SPECIALIST ADVICE: the intersection of domicile, residency, deemed domicile, and IHT is among the most complex areas of UK tax law. Non-domiciled individuals with UK property or connections should take regular specialist advice — particularly given frequent legislative changes.

The Autumn Budget 2024 announced significant changes to the IHT treatment of non-domiciled individuals and their estates, effective from 6 April 2025: (1) THE NEW 'LONG-TERM UK RESIDENT' TEST: the previous deemed domicile test (15 out of 20 UK tax years) has been replaced by a new 'long-term UK resident' (LTUR) test from 6 April 2025. A person is an LTUR if they have been UK resident for 10 or more of the previous 20 UK tax years. Once an LTUR, their worldwide assets are subject to UK IHT; (2) THE 'TAIL' — CONTINUING IHT LIABILITY AFTER LEAVING THE UK: a person who was an LTUR continues to have their worldwide assets subject to UK IHT for a period after leaving the UK. The length of this 'tail' depends on how long they were UK resident: (a) 10-19 years UK residence: 3-year tail after leaving; (b) 20 years UK residence: 10-year tail after leaving. This is a significant change — previously the deemed domicile period ended relatively quickly after leaving; (3) TRANSITIONAL PROVISIONS: there are transitional provisions for those who were previously deemed domiciled under the old 15/20-year test. Specialist advice is needed to understand the transitional position for any individual who was already deemed domiciled at April 2025; (4) THE s.267ZA ELECTION IN THE NEW REGIME: the non-dom spouse election under s.267ZA continues to exist in the new regime. However, the underlying analysis of when to make the election changes: (a) the surviving spouse may become a LTUR through their own residence, making the election unnecessary; (b) the election may be less valuable where the deceased's estate is smaller or where the surviving spouse has substantial non-UK assets; (c) the LTUR tail provisions mean that a surviving spouse who later leaves the UK may still have their worldwide estate subject to UK IHT for years after departure; (5) ONGOING REVIEW: the non-domicile IHT rules are in a period of significant change. Any planning undertaken before April 2025 should be reviewed in light of the new LTUR test. Specialist tax advice is essential.