UK Mixed-Domicile Couple IHT Planning

The position before April 2025

Before 6 April 2025, UK inheritance tax applied to individuals based on their domicile. A UK-domiciled individual was subject to IHT on worldwide assets; a non-UK-domiciled individual was subject only on UK-situated assets. Deemed domicile rules applied to long-term residents (15 of 20 years) bringing them into worldwide IHT.

The mixed-domicile spouse exemption cap

The unlimited spouse exemption applied between two UK-domiciled spouses or two non-UK-domiciled spouses. Where one spouse was UK-domiciled and the other was not, the exemption from UK-domiciled to non-UK-domiciled was capped at the nil-rate band (GBP 325,000). The non-domiciled spouse could elect to be treated as UK-domiciled to access the unlimited exemption, at the cost of bringing their worldwide assets into UK IHT.

The April 2025 reform

From 6 April 2025 the UK moved to a residence-based system. An individual is a long-term UK resident (and within worldwide IHT) once they have been UK resident for 10 of the previous 20 tax years. They retain that status for a number of years after ceasing to be UK resident, with a tail varying with length of prior residence.

The new spouse exemption

Under the new regime, the unlimited spouse exemption applies between long-term UK residents. Where one spouse is a long-term resident and the other is not, restrictions parallel to the old mixed-domicile cap may apply. Specific rules govern transition for couples affected at the change.

Excluded property trusts

Excluded property trusts established before 30 October 2024 by then non-UK-domiciled settlors retained some protection under the original rules. From the 2025 changes, the protection is subject to ongoing residence-based tests. The detailed mechanics are set out in the Finance Act provisions implementing the reform.

Planning implications

Mixed-residence couples should consider: timing of any change in residence status, the use of the spouse election where still beneficial, structures for non-UK assets (life interest trusts, family investment companies), gifts during lifetime that fall outside long-term residence status, and the impact on existing offshore trust structures.

Cross-border wills

Couples with assets in multiple jurisdictions often hold separate wills for each country's assets, drafted by local lawyers. The wills should be consistent and not revoke each other. Forced heirship rules in civil law jurisdictions can override testamentary disposition for property situated in those countries.

Cross-border wills and forced heirship

Couples with assets in multiple jurisdictions often hold separate wills for each country's assets, drafted by local lawyers. The wills should be consistent and should not revoke each other. The standard approach is to have a UK will covering UK-situated assets and separate wills for each material non-UK jurisdiction covering assets in that country.

Forced heirship rules in civil law jurisdictions (France, Spain, Italy, Germany, and most Continental European countries) can override testamentary disposition for property situated in those countries. Forced heirship typically reserves a defined share of the estate for descendants, with the testator's free disposition restricted. The EU Succession Regulation (EU 650/2012) allows individuals to elect for the law of their nationality to apply to their estate, potentially avoiding forced heirship rules; the Regulation does not apply in the UK but applies to UK citizens with assets in EU member states.

The long-term residence test in detail

From 6 April 2025 the UK moved from a domicile-based to a residence-based IHT system. An individual is a long-term UK resident (and within worldwide IHT) once they have been UK resident for 10 of the previous 20 tax years. The 10 of 20 test applies to each individual independently. Long-term residence is determined on the date the IHT chargeable event occurs (typically death, or a lifetime chargeable transfer into a trust).

Once an individual ceases to be UK resident, they retain long-term resident status for a tail of years depending on the length of their prior residence. The standard tail is 3 to 10 years, with the longer tails applying to those with the longest prior residence. The specific rules are set out in the Finance Act 2025 amendments to the Inheritance Tax Act 1984.

Individuals who have not been UK resident for 10 of the previous 20 tax years are not long-term UK residents and are subject to UK IHT only on UK-situated assets. The reform broadly retains the policy that short-term UK residents and visitors are not exposed to worldwide UK IHT.

The previous mixed-domicile spouse exemption cap

Before April 2025, transfers from a UK-domiciled spouse to a non-UK-domiciled spouse were limited by the spouse exemption cap of GBP 325,000. Above the cap, the transfer was taxable. The non-UK-domiciled spouse could elect under section 267ZA of the Inheritance Tax Act 1984 to be treated as UK-domiciled, accessing the unlimited spouse exemption, at the cost of bringing their worldwide assets into UK IHT for the future.

The election was revocable on the spouse's later non-residence (becoming resident in another country for 4 years would revoke the election). The election was a one-way ticket for many couples; making the election typically created more IHT exposure than it relieved unless the non-domiciled spouse expected substantial transfers from the UK-domiciled spouse.

The new spouse exemption regime

Under the residence-based regime from April 2025, the spouse exemption applies without restriction between two long-term UK residents, and between two non-long-term UK residents (where both are outside UK IHT on their non-UK assets). Where one spouse is a long-term UK resident and the other is not, restrictions apply similar to the previous mixed-domicile cap but framed in the new terminology.

The detailed mechanics involve a transitional spouse exemption cap for transfers from a long-term resident to a non-long-term resident spouse. The cap is set at the nil-rate band level (GBP 325,000) with elections available similar to the old section 267ZA mechanism. The non-long-term resident spouse can elect to be treated as long-term resident for IHT purposes, accessing the unlimited exemption at the cost of worldwide IHT exposure.

Excluded property trusts under the new regime

Excluded property trusts established before 30 October 2024 by then non-UK-domiciled settlors retained protected status under transitional rules. The trust's non-UK situated assets remained outside UK IHT regardless of the settlor's later status. From the 2025 reform, the protection is subject to the long-term residence test of the settlor and to specific transitional provisions.

Excluded property trusts established by long-term UK residents from April 2025 do not benefit from the same protection. The trust's assets fall within the relevant property regime for IHT, with entry, periodic, and exit charges. The April 2025 reform thus narrows substantially the ability to use offshore trust structures for IHT planning.

Planning steps for affected couples

Mixed-residence couples affected by the reform should review their wills and trust structures in light of the new rules. Key questions include: which spouse is currently long-term UK resident; how the spouse exemption operates between them under the new regime; whether the GBP 325,000 transitional cap applies and whether election would be beneficial; how existing trust structures interact with the new test; and how the long-term residence status would change if one spouse moved abroad.

Pre-existing wills that were drafted under the previous domicile-based regime may need updating to reflect the new framework. Wills with specific provisions designed around the old section 267ZA election may now be sub-optimal. Specialist cross-border tax advice is essential for couples with material assets and mixed-residence status.

Disclaimer

This article provides general information on UK mixed-domicile and residence-based IHT planning and is not personal tax or legal advice. The April 2025 reform is recent and complex; specialist cross-border tax advice is essential.

Frequently asked questions

Did the domicile concept disappear from UK tax?

Domicile remains relevant for some non-IHT purposes (e.g. some succession matters under conflict of laws). For IHT purposes the residence-based test now applies.

When does long-term resident status apply?

After 10 of the previous 20 tax years of UK residence, an individual is treated as a long-term UK resident for IHT purposes.

Are pre-existing trusts protected?Some pre-30 October 2024 excluded property trusts retain protections under transitional rules. The detailed mechanics depend on the trust's circumstances.

What about non-UK assets of a non-resident spouse?

Non-UK assets of a non-long-term-resident spouse generally remain outside UK IHT, subject to specific rules.

Should we make new wills before the change?

Couples affected by the reform should review their wills, trust structures, and IHT planning with specialist advice in light of the new rules.

Frequently asked questions

Did the domicile concept disappear from UK tax?

Domicile remains relevant for some non-IHT purposes. For IHT purposes the residence-based test now applies.

When does long-term resident status apply?

After 10 of the previous 20 tax years of UK residence, an individual is treated as a long-term UK resident for IHT purposes.

Are pre-existing trusts protected?

Some pre-30 October 2024 excluded property trusts retain protections under transitional rules.

What about non-UK assets of a non-resident spouse?

Non-UK assets of a non-long-term-resident spouse generally remain outside UK IHT, subject to specific rules.

Should we make new wills before the change?

Couples affected by the reform should review their wills, trust structures, and IHT planning with specialist advice.