Very broadly, under the general law a person’s domicile is the place which they regard as their permanent home. An individual who was born and brought up in, say, France and is living in London for a few years but who intends to return home to France when their current work commitments allow, is likely to have a French domicile. For inheritance tax purposes however, a long-time resident may be treated as domiciled in the UK even though they in fact intend to return to their permanent home – see the explanation of deemed domicile opposite.
There is in general no inheritance tax charge on gifts made by one spouse or civil partner to the other. However this wide inheritance tax exemption is not available for gifts and inheritances that pass from a UK domiciled person to his or her nondom spouse or civil partner. All that is available is an historic, fixed, inheritance tax spouse exemption of £55,000, plus the nil rate band that is available to all individuals (for the current year £312,000), plus the ability to make potentially exempt transfers. So for most estates, some planning is needed to avoid a substantial inheritance tax bill.
There is no ‘one size fits all’ solution for mixed domicile marriages and civil partnerships. Much will depend on the assets involved and on the interrelationship between UK taxation and the tax rules that apply in the non-dom spouse’s home country. Sometimes a double taxation treaty between the two countries will help. By conducting a careful assessment of which assets should pass in which direction, and ensuring well-organised lifetime arrangements, the inheritance tax situation can often be improved.
What is a ‘domicile’?
Under the general law your domicile is essentially the place you regard as your ‘real’ home, maybe a country to which you intend to return even though you do not in fact live there at the moment. It is a question of fact. Your domicile status decides, among other things, whether English law or a foreign law applies to matrimonial disputes, and also questions of who would benefit from your estate in the event of your death. Someone born abroad with a foreign domicile will generally find it fairly easy to retain that foreign domicile for an extended period, unless they make a positive choice to acquire an English domicile.
Inheritance tax has its own particular gloss on the general meaning of domicile. In particular, people who have been resident in the UK for an extended period are treated as domiciled here, whether or not that is in fact the case, so that their worldwide assets become vulnerable to inheritance tax. The extended period is based on 17 out of 20 tax years, but the detail of the rules means that this can be a scant 15 years in practice