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Separation and divorce:
Inheritance tax

Inheritance tax is a tax on the value of your estate when you die and also on any part of it you give away during your lifetime (subject to reliefs and exemptions). Transfers between spouses are exempt from inheritance tax. The exception is where the spouse receiving the asset does not have a UK domicile. Then the exemption is limited to a cumulative total of �55,000.

Jargon buster: Domicile

Your domicile is generally the country you were born in. It is possible to establish another domicile if you move to another country permanently but the rules are complex.

You remain connected to your spouse for inheritance tax purposes until the decree absolute so you can make exempt transfers up to the decree absolute (in contrast to the rules for capital gains tax). For inheritance tax purposes the value of an asset leaving your estate (i.e. being given to someone else) is the reduction in the value of your estate. Due to related property rules (see Jargon buster), this may be different to the value of the asset itself.

Jargon buster: Related property

The value of any property in a person's estate is found by taking related property into account if that results in a higher value. Property is related to the property in your estate if it is in your spouse's estate and 'compliments or matches' the assets you hold, such as shares in the same company or adjoining land.

The value of your estate property and the related property taken together is then apportioned to arrive at the value in your estate.

For example, consider if you own a property worth �200,000 and your spouse owns the plot of land next to it which is worth �150,000 but both would be worth �700,000 if viewed in total. The value of the property in your estate for inheritance tax purposes would be:

�200,000
-----------
�200,000 + �150,000

� �700,000 = �400,000

In the above example if you gifted the property before the divorce (decree absolute) the value for inheritance tax purposes would be �400,000. If you waited until after the divorce before making the transfer, the value for inheritance tax purposes would only be �200,000.