The newspapers regularly highlight the tax advantages of being ‘nondomiciled’ and they certainly exist. There can, however, also be significant inheritance tax problems where a non UK-domiciled person is married to an English domiciliary – a mixed domicile marriage. The same will apply to those in a mixed domicile civil partnership. These can be alleviated by careful advance planning.

Restrictions on Inheritance Tax Spouse Exemption

Most people are aware that there is no inheritance tax (IHT) on gifts between spouses and that this makes it easy – if not necessarily very tax efficient – to avoid IHT on the death of the first spouse to die, simply by leaving most of the estate to the survivor. It is less widely appreciated, however, that the normal IHT spouse exemption is not available for gifts and inheritances from a UK-domiciled person to his or her non-UK-domiciled spouse. All that is available is an historic, fixed IHT spouse exemption of £55,000, plus the nil rate band that all individuals may use. This is all that is available to cover both lifetime gifts and property passing on death.

Unless an estate is very modest indeed, forward planning is needed to avoid an IHT bill at 40%. In some cases the end result can be tax at 40% on both deaths, producing an effective rate of nearly 65%. This can happen because the spouse who had been non-domiciled becomes UK-domiciled at some time after the first death, probably because the children settle here.

Even where the surviving spouse does not acquire a UK domicile, they may retain sufficient UK assets which will be exposed to a second IHT charge on death or they may acquire a ‘deemed domicile’.

The tax problems of a mixed domicile marriage are sometimes seen as intractable, and there is certainly no ‘one size fits all’ solution. Simply to place assets offshore during the joint lives will not deal with the issue. A careful assessment of which assets should pass in which direction, in conjunction with personal pensions planning, plus well-organised lifetime arrangements, can transform the situation however.

Deeds of Variation

It is not uncommon for younger people to put off estate planning on the basis that a Deed of Variation can be used to rewrite the Will (or intestacy) in a more tax-efficient way after death. Deeds of Variation can indeed be invaluable, but they will rarely be as efficient as good pre-death planning. For example, there may well be long-term income tax and capital gains tax (CGT) disadvantages; and if minor children are involved an effective Deed of Variation may be impossible. Dying without a Will can create distressing family situations, for example where the surviving spouse does not even become outright owner of the family home.

Offshore Trusts and a window of opportunity

The focus so far has been the tax problems of mixed domicile marriages, because those problems are so often overlooked. Mixed domiciles can also, however, be used to great IHT advantage. Tailored to individual circumstances, an offshore trust made by the non-domiciled spouse can be wholly outside the IHT net, allowing assets to pass down a generation without IHT. That said, unless care is taken an offshore trust may produce little or no tax benefit, and can create a messy situation to be disentangled after a death. In particular, it is easy to fall foul of the complex IHT ‘reservation of benefit’ rules.

This window of opportunity offered by offshore trusts will close after an extended period of residence in the UK, when the non-UK domiciled spouse will be deemed to be domiciled in the UK for IHT purposes. The non-domiciled spouse should review the planning possibilities well before the 15 year marker (see box). Speculation is that the Government’s current review in this area may reduce this period to 10, 7 or even 5 years, and may extend the rules to CGT as well as IHT.

Long-term CGT planning

Long term CGT estate planning can, however, be highly beneficial in nondomicile and non-residence cases. An offshore trust made by a non-domiciled spouse may not only avoid the IHT net; it may also defer or avoid long-term CGT. Crude variants of this structure, where the UK-domiciled spouse provides the assets to be settled and then benefits from them are, however, vulnerable.

Residence abroad also calls for careful planning ahead in relation to the CGT principal private residence exemption.

Planning for likely inheritances, and asset protection

When the non-domiciled parent of a non-domiciled spouse dies, any inheritance received by the nondomiciled spouse is often simply added to the family’s general finances. This may make the inheritance vulnerable to UK tax on the death of the domiciled spouse, and possibly also vulnerable to creditors. If the parent of the nondomiciled spouse had instead been invited to settle the property in an offshore trust, IHT would have been avoided, and the asset protection profile considerably improved. The implications in the parent’s home country have, of course, to be considered.

Foreign Law implications

In every mixed domicile marriage, attention must be given to the implications of any tax planning in the non-domiciled spouse’s own home country (and any country where the parties are presently resident). Apparently excellent UK planning can be found – often when it is too late – to have produced undesirable results elsewhere. The best possible balance has to be struck.

Civil Partnerships

A same sex couple with different domiciles who enter into a civil partnership need to adopt careful tax planning similar to that required by a married couple.


The most significant problem for a mixed domicile marriage or civil partnership may be the restriction on the IHT spouse exemption but cohabitees, whatever their domicile status, obviously do not benefit from the spouse exemption at all. Quite apart from tax planning, cohabitees (whether of mixed domicile or not) need to take particular care that they carry out the basic estate planning to achieve their practical wishes as to who should actually inherit their property: left to fill a void, the law will usually produce unpalatable results.

Changes ahead?

The Government is reviewing the taxation of non-domiciliaries and non-residents. The outcome and timescale are still unclear. It is, however, almost certain that any new rules would be less favourable to the taxpayer than the present ones. Since pre-existing arrangements might retain their favoured status, this is a powerful incentive to act sooner rather than later.