Inheritance tax pitfalls of mixed domicile marriages and civil partnerships

Judith Millar Partner
Marriages and civil partnerships where one partner is domiciled in the UK and the other is not have long presented challenging inheritance tax (IHT) issues.
An election procedure whereby the non-UK domiciled (non dom) partner may elect to be treated, for IHT purposes only, as if they were domiciled in the UK can assist in some cases, particularly following a death, but needs to be treated with caution. Planning in advance is generally the preferred option and for that it is important to have a clear understanding of each partner’s domicile position.
Changes to the taxation of non doms, effective in 2017, saw the long-standing deemed domicile provision for IHT purposes extended to apply for capital gains tax (CGT) and income tax purposes. The period of residence in the UK before the deemed domicile rules apply was also shortened to 15 out of 20 tax years.
In addition, a new category of ‘formerly domiciled residents’ (FDRs) was introduced. Those falling into this category are particularly disadvantaged from a tax perspective; they are treated as deemed domiciled from the start of their second year of residence in the UK for CGT, income tax and IHT purposes. Some couples could therefore find themselves caught in the mixed domicile marriage trap much sooner than they might have expected.
A person falls into this FDR category if they were born in the UK with a UK domicile of origin. Their parents might have emigrated shortly after the child’s birth and the individual concerned might have lived their entire life outside the UK and have an actual domicile elsewhere, but coming to the UK for just two years will mean that they are deemed domiciled for these tax purposes.
Careful analysis is required of a non dom who was born in the UK to ascertain whether they are an FDR or will fall within the more benign general regime which allows a longer period of residence before becoming deemed domiciled.
FDRs (and indeed all non-UK domiciliaries residing in the UK for an extended period of time) will of course need detailed advice on all the tax implications: IHT planning is just one aspect to be reviewed, but for many the IHT issues will prove key in terms of advice needed.
We have a detailed briefing on the IHT issues which can arise in a mixed domicile marriage or civil partnership and considering the election procedure. Please download a copy here.