Inheritance Tax and Your Foreign Spouse: When the Unlimited Exemption Is Actually Capped at £325,000

For deaths and transfers on or after 6 April 2025, the spouse exemption depends on one status: whether each of you is a long-term UK resident, meaning UK tax resident for at least 10 of the 20 tax years immediately before the transfer (GOV.UK). Residence for each year is judged under the normal Income Tax rules, the Statutory Residence Test for 2013/14 onwards and the pre-SRT rules for earlier years (IHTM47020, HMRC). Nationality, passports and where you were born are all irrelevant. There are only three combinations that matter.

HMRC's manual confirms both halves of this: the restriction does not apply where both of you are long-term UK residents, or where the transferor is not one but the recipient is, and where it does apply the exemption is limited to the nil-rate band at the date of transfer (IHTM47030, HMRC). The logic is anti-avoidance: a long-term resident is within UK IHT on worldwide assets, while a spouse who is not one is broadly outside it on everything except UK assets, so an unlimited exemption would let wealth flow tax free out of the UK net.

Notice which couples this catches. The classic case is a British careerist with a recently arrived foreign spouse: the spouse will not pass the 10-of-20 test for years, so the cap applies. But it also catches couples where both are British if one has spent enough years abroad, and it stops applying, without anyone doing anything, once the foreign spouse clocks up 10 resident years. Status can also change after leaving the UK, because long-term resident status persists for a tail of 3 to 10 years depending on how long you were resident (GOV.UK). Our guide to the residence-based IHT rules covers the test and the tail in full.

The cap equals the nil-rate band in force at the date of the transfer. The nil-rate band is £325,000 (GOV.UK), so that is the cap today. Two features make it meaner than it first looks.

First, it is cumulative. The limit applies to the running total of every exempt transfer you have ever made to a spouse or civil partner, and HMRC confirms the calculation must take account of amounts allowed on earlier transfers, including transfers to a previous spouse (IHTM11033, HMRC). If you gave your spouse £200,000 towards a house in 2026, only £125,000 of exemption is left for everything else, including whatever your will leaves them on death. This is not an annual allowance that refreshes; it is one pot for your whole life.

Second, it does not track the exemption you think you are using. Couples move money between each other constantly, joint accounts, deposits, renovations, assuming none of it matters, yet every transfer quietly consumes the pot, and on death the executors must reconstruct the history. Where the limit is exceeded, HMRC caseworkers are instructed to allocate the exemption in the way most favourable to the spouse (IHTM47030, HMRC), but favourable allocation does not make the pot bigger.

One piece of good news for anyone reading older material: the cap used to be dramatically worse. For transfers between 9 March 1982 and 5 April 2013 the limit was a flat £55,000, and it was linked to the nil-rate band only from 6 April 2013 (IHTM11033, HMRC). If your understanding of this rule dates from before 2013, the number you remember is almost six times too small.

The crucial point most people miss is that the capped exemption and your own nil-rate band are separate reliefs that stack. The cap happens to be set at the same figure as the nil-rate band, £325,000, but using one does not use the other. Take David, a long-term UK resident who dies in 2026/27 leaving his entire £1,200,000 estate to his wife Amara, who moved to the UK three years ago and is not a long-term UK resident. Assume David made no lifetime gifts and the residence nil rate band is not in point because nothing passes to children.

So Amara receives £325,000 exempt as his spouse, David's own £325,000 nil-rate band covers the next slice, and the remaining £550,000 is taxed at the standard 40% rate (GOV.UK), costing £220,000; the same estate left to a long-term resident spouse pays nothing. A long-term resident can therefore pass £650,000 to a non-long-term-resident spouse tax free, provided lifetime transfers have not already eaten the cap and the nil-rate band is intact.

There is a second-order cost hiding in the last row of the table. When the exemption is unlimited, the first death uses no nil-rate band, and the unused 100% transfers to the survivor's estate, giving it up to £650,000 of nil-rate band later. In David's case his nil-rate band is fully consumed shielding the capped excess, so nothing transfers, and if Amara later dies a long-term UK resident her own estate has only her single £325,000 band plus any residence nil rate band. The cap therefore costs the couple twice: £220,000 now, and a lost transferable band worth up to £130,000 of tax later.

Parliament provides an escape hatch. A person who is not a long-term UK resident, but who is or was married to or in a civil partnership with a long-term UK resident at the date of the charge, can elect under IHTA 1984 s267ZC and s267ZD to be treated as if they were a long-term UK resident (IHTM47031, HMRC). Once the election is in effect, transfers between the couple qualify for the full, unlimited spouse exemption (IHTM47038, HMRC).

The mechanics are straightforward. The election is made by notice in writing to HMRC, stating the electing person's full name, address and date of birth, the spouse's name, and the date from which the election is to take effect (IHTM47034, HMRC). It can be made in lifetime by the person themselves, or after their death by their personal representatives (IHTM47033, HMRC), which matters enormously: if a long-term resident dies leaving everything to a non-long-term-resident spouse, the survivor can still elect afterwards and convert a capped exemption into a full one. The effective date can be backdated by up to seven years, seven years from the date of a lifetime election or seven years from the death for a death election, but never earlier than 6 April 2025, and the electing person must have been married to or in a civil partnership with a long-term UK resident on the chosen date (IHTM47037, HMRC). Backdating lets the election sweep up transfers that have already happened.

The price is the other side of the same coin. An electing person is treated as a long-term UK resident for all IHT purposes, not just the spouse exemption: their worldwide assets come within UK IHT, foreign assets lose excluded property status, and transfers made after the effective date, including ones that were exempt when made, can retrospectively become chargeable (IHTM47038, HMRC). And the election cannot be revoked. It only falls away of its own accord after the electing person has been non-UK resident for income tax purposes for 10 consecutive tax years, ceasing at the end of the tenth (IHTM47040, HMRC). A spouse with modest foreign assets who intends to stay in the UK loses little by electing; a spouse with a substantial foreign estate who may leave the UK is signing that estate into the UK net for at least a decade after departure.

The arithmetic that decides it: compare the IHT saved by the unlimited exemption on the first death against the IHT created by pulling the electing spouse's worldwide estate into the UK net on the second. Electing after David's death saves £220,000 immediately; if Amara's foreign assets are modest, or she will stay long enough to become a long-term resident anyway, the election is close to a free lunch. If she owns significant property abroad and plans to go home, it may be the most expensive £220,000 the family ever saved. This is precisely the sum to take advice on before signing anything.

The election is not the only route. Because a transfer to your spouse above the capped exemption is treated like a gift to anyone else, it also benefits from the rule that applies to any lifetime gift: no IHT is due if you live seven years after making it (GOV.UK). A long-term resident who gives a non-long-term-resident spouse £1,000,000 today uses £325,000 of capped exemption, and the £675,000 excess is a potentially exempt transfer that leaves the estate entirely on the seventh anniversary. Even a death inside the window may be softened by taper relief, which reduces the rate on the excess above the nil-rate band from 32% at three to four years down to 8% at six to seven years (GOV.UK). The planning conclusion is blunt: equalising wealth with a non-long-term-resident spouse is a lifetime project, started early, not a job for your will. The seven-year rule guide covers the clock and taper in detail.

The small exemptions help at the margins. The £3,000 annual exemption covers gifts each tax year without them being added to your estate (GOV.UK), and an unused year can be carried forward once, though at these sums it is a supplement to the seven-year route, not a substitute for it.

Wills for these couples need drafting around the cap rather than in denial of it. The default structure leaves the survivor what passes tax free, the £325,000 capped exemption, routes the nil-rate band to children or a trust, and deals with the excess deliberately rather than accidentally. Remember also what the cap is protecting you from: assets the surviving spouse holds are only within UK IHT on their own later death if they are then a long-term resident or the assets are UK situated, so a survivor who returns home before the 10-of-20 test catches them takes the foreign wealth out of the UK net. And where the wealthier partner is the one who is not a long-term resident, the position inverts: their transfers to a UK spouse are unlimited, and their non-UK assets are outside UK IHT anyway, territory covered in our guides to reducing inheritance tax and excluded property trusts.

Until 6 April 2025 this entire area ran on domicile: the exemption was capped where a UK-domiciled person made transfers to a non-UK-domiciled spouse, and the fix was an election to be treated as UK domiciled. The domicile and deemed domicile rules were replaced by the long-term UK resident rules for deaths and transfers on or after 6 April 2025 (GOV.UK), and the change moves real people across the line in both directions.

A foreign national who kept a foreign domicile of origin through twenty years in Surrey was a non-dom spouse under the old rules, capped unless she elected. Under the new rules she sailed past the 10-of-20 test years ago: the exemption to her is unlimited, and an old will that carefully rationed her legacy to the cap is giving away tax-free capacity for nothing. In the opposite direction, an English-domiciled British spouse who has spent fifteen years abroad was safe under the old test but may now fail the long-term resident test, so transfers to him from a long-term resident partner have quietly become capped. Old domicile elections do continue: an election made under the pre-2025 rules treats the electing spouse as a long-term UK resident from 6 April 2025, with its own transitional rules for when it falls away, 4 consecutive non-resident tax years for elections made before 30 October 2024 and 10 for later ones (IHTM47041, HMRC). Anyone relying on one should have it checked rather than assume it still does what it did.

The practical instruction is simple. If your will, or your understanding of your exposure, was settled before April 2025 and involves a cross-border marriage, rerun it: establish each partner's residence history year by year, work out who is a long-term resident now and when that changes, and only then choose between the cap, the seven-year clock and the election. Our guide to how inheritance tax works covers the basics if they are also new to you.

This is the corner of IHT where the biggest numbers turn on the smallest details: one resident year in a twenty-year history, one undocumented transfer, one election signed without pricing the worldwide consequence. We advise internationally married couples on establishing each partner's long-term resident status and when it flips, quantifying the cap already used, modelling the election against the seven-year gifting route, and briefing the will drafting so the cap is planned around rather than discovered by the executors.

Fees are fixed and agreed upfront, never hourly surprises. The right first step is a free clarity call: bring your rough residence histories and a picture of what sits where, and we will tell you whether the cap is your problem, what it would cost on current numbers, and a fixed fee for the work before anything starts. You can read more about the practice on our non-dom and residency services page. Where a couple's position involves US estate and gift tax as well, we coordinate the US side with our US partners, Enrolled Agents and CPAs, so the two systems are planned together rather than in sequence.