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My wife has been living here with me (UK Citizen) for the past two years and we are getting close to changing to ILR (we married here, she's Russian).

I know the documents we need, thats no problem, however does she need to do this English test, or life test?

Also, if we apply will they want my passport, or can we do everything in person? I travel for work all the time, I can't be without a passport for weeks on end!

Thanks in advance.

You wife will need to pass the Life in the UK test (KOL), not the new A1 English test.
You can apply in person at one of the PEO's. Appointment slots are generally released 6 weeks before. Some PEO's get fully booked very quickly, Croydon in particular so you may need to be flexible in your choice.
You're clear about her qualifying date?

Thanks for that, so she still needs a Life exam even as my wife, and I'm British?
What would happen if she failed? (She won't, fluent english and a masters studied in english...she's the clever one out of us)
We have a 2 year old now, UK National, are they really going to try and ask her to leave....we'd stuff them silly at court on all sorts of levels. Bonkers.............

Sorry, just me sounding off on the b##*&%s of it all.

Yes I'm good on the dates, its well covered here.

Thanks

The Home Office wouldn't ask her to leave but unless she passes the KOL test she would have to apply for FLR(M) - Further Leave to Remain which would probably grant her an extension of 2 years. When the KOL is passed she could then apply for ILR at any time during the 2 years. i.e She wouldn't have to wait the full term of the extension.
However...and this may well sound even more unreasonable...in order to apply for FLR she would first have to pass the new A1 English test!
I would strongly advise that she sits the Life in the UK test as soon as possible as even though you have confidence in her proficiency in English, this isn't an English language test as such. In fact a surprisingly high percentage of those from English speaking countries fail the first time. I don't know whether she's read through the study material, but it includes British social history, politics, laws and customs. Would she know without studying for example, what a Quango is, or what percentage of those living in London are of an ethnic minority?
She will have to answer 24 questions from chapters 2-6 inclusive and obtain a pass level of 18. She needs to leave a week between taking the test and the submitting her SET(M) application.