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Composites of ferroelectric and paraelectric perovskites have attracted a lot of attention due to their application potential in energy storage as well as novel computing and memory devices. So far the main focus of research has been on superlattices and ferroelectric particles in a paraelectric matrix, while the impact of paraelectric inclusions on a ferroelectric matrix is surprisingly underrepresented. To close this gap in knowledge we perform molecular dynamics simulations using an abinitio derived effective Hamiltonian for BaTiO₃–SrTiO₃ and reveal the dependency of phase stability and phase transitions on the size and distances of paraelectric inclusions. We discuss how the combination of compressive strain and depolarization fields at the SrTiO₃ interfaces induces large local polarization, complex domain structures and coexisting phases as well as diffuse phase transitions and reduced coercive fields.