Will our children have to pay more IHT because my wife has left the UK?

My wife and I have been married for 40 years. We are not separated, nor wish to be, but for family reasons she moved back to her native Norway in 1995, where she now lives as my non-domiciled spouse. We’ve agreed that on my passing, all my assets will be left to her and she will distribute them equally, one-third each, between her and our two children.

I thought she would inherit my estate tax-free but I’m told this is not the case because she has not lived with me in the UK for 26 years. Does this mean she will only be allowed the £325,000 tax exempt allowance, and likewise my children, before they must pay 40 per cent inheritance tax (IHT) on the residue? This seems unfair as we consider ourselves just as married as any other married couple. What advice can you give us to avoid or limit paying excessive IHT? 

Vanessa Lee, tax partner at accountancy and business advisory firm BDO, says your personal situation, while not uncommon, is complicated. Currently you are able to pass up to £650,000 free of IHT to your wife. This is made up of the non-domiciled-spouse exemption of £325,000 and your nil rate band (NRB) of £325,000.

One option your wife may wish to consider is to make an election to be treated as deemed UK domicile for IHT purposes. This would not affect her income tax or capital gains tax position, but would mean that her worldwide estate would be subject to UK IHT. She would benefit from unlimited spousal exemption in respect of any gifts or bequests from you during your lifetime or in accordance with your will.

However, as this election is irrevocable it should be given appropriate consideration. There are options in terms of the timing of the election. It may be made during your lifetime, potentially backdated, or within two years of your death (or longer at HMRC’s discretion).

Subject to any recent or impending gifts which you are considering making to your wife, the flexibility of when to make the election may provide you both with some time to consider the impact on her own tax position in Norway, alongside the implications regarding your intentions around supporting your children.

Clearly, the size and complexity of your estate and the extent to which it exceeds the nil rate band is likely to dictate what other steps you may wish to consider, but the residential nil rate band (RNRB) of £175,000 may be available should you choose to leave your home to your children. 

There are other steps that you may wish to consider in terms of mitigating your taxable estate. You could speed up giving away your assets within your lifetime, and if you have a charitable cause which is important to you, a clause in your will stating that 10 per cent or more of your net estate is to be left to a UK registered charity will reduce the rate of IHT imposed to 36 per cent instead of 40 per cent.

You should also seek tax and legal advice specifically focusing on any historic gifts and the consequences of these gifts from both a UK and Norwegian perspective to mitigate adverse or unintended tax implications.

Can we claim multiple dwellings relief on our property purchase?

My husband and I have recently relocated from an apartment in the City to a Cotswold farmhouse with a self-contained annex that my husband’s parents can live in, so we can help look after them in their old age. We purchased the property in April and paid the resulting stamp duty bill shortly afterwards. However, we now believe that the property may be eligible for multiple dwellings relief (MDR) because of the separate annex. How can we confirm if the property is eligible and can we claim a tax refund from HMRC if it is? 

Adam Kay, tax partner at Saffery Champness, says despite the fact that purchasing a property is something that almost everyone does at some point in their lives, the stamp duty land tax (SDLT) implications are hugely complex. Multiple dwellings relief (MDR) is not something you should try to work out yourselves, so make sure you take advice. 

MDR is a relief from SDLT in which the transaction involves the purchase of more than one “dwelling”. MDR is not given automatically and relief must be claimed on the SDLT return. The onus is on you to determine if MDR applies and then to make a claim. You have nine months from the date you filed your original SDLT return (14 days after the transaction took place) to file an amended SDLT return and claim MDR in order to trigger a tax refund.

The relief operates by charging to SDLT the total consideration averaged by the number of dwellings acquired and the averaged SDLT charge is then multiplied by the number of dwellings. For example, if you paid £1m for the property and it consists of two separate dwellings, then rather than paying SDLT on £1m you will instead pay tax on two lots of £500,000 (subject to a minimum 1 per cent on the aggregate sales consideration). This essentially gives you access to the nil rate band portion twice, together with the lower rates of SDLT. With the high rates of SDLT currently in force, the savings can be substantial.

The key requirement for MDR is that more than one dwelling is acquired in the transaction. While there is a definition of dwelling in the legislation, it is quite vague, and there have been a number of tax cases on this point recently. HMRC have won all of these, which were focused on whether there is real separation between the properties. Would the inhabitants of one dwelling have access to the other, or is there real privacy and security? There are a number of other requirements as well, and getting a real understanding of whether this annex is a dwelling is critical.

There are other points to think about. The 3 per cent surcharge for buying additional dwellings can sometimes apply in these cases, since you will be arguing that you have acquired two dwellings in this transaction. There is a relief which can apply, known as “granny flat relief”, but again you will need to check that the conditions for this relief are satisfied.

Given that you have already filed your SDLT return, the starting point would be to contact your conveyancing solicitor to see if this point was considered at the time.

Do bear in mind that HMRC often operates on a “pay now check later” basis, so even if you receive a refund you should retain the funds for at least a year to ensure that if you later get an inquiry into your claim you are in a position to return the money to HMRC if they successfully challenge your refund at a later stage.

Finally, please note that MDR could be lost if there is a change in circumstances within three years from the date of the purchase, such as a conversion of two dwellings into one.

The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.

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