UK inheritance tax position of Indian domiciled individuals
Non-UK nationals who come to live in the UK will typically fall within the full scope of UK inheritance tax (IHT), at the latest, once they have been resident in the UK for 15 of the previous 20 tax years. This position may, however, be overridden by the provisions of a relevant tax treaty. The 1956 Estate Duty Treaty between the UK and India is one such treaty: individuals covered by the provisions of this treaty may not be subject to UK IHT on their non-UK assets regardless of the length of time they have lived in the UK.
Domicile and IHT
An individual’s liability to UK IHT depends on their “domicile”.
Domicile is a common law concept which in broad terms can be considered a person’s “place of belonging”. It is generally the place they consider to be their permanent home and where they have the closest ties.
All individuals acquire a “domicile of origin” at birth. This will typically be the domicile of their father, as long as their father was alive and their parents were married at the time of the individual’s birth. This can subsequently be replaced with a “domicile of dependency” (if, while they are under 16, the domicile of the person to whom they are legally dependent changes) or a “domicile of choice” (if, after the age of 16, they decide to settle permanently in another jurisdiction).
Where an individual is not domiciled in the UK under common law principles, they may nevertheless be treated as domiciled in the UK for UK tax purposes. Under UK legislation, an individual will be deemed to be domiciled in the UK for IHT purposes where they satisfy one of the following:
- The individual has been UK resident for at least 15 of the previous 20 tax years and is now UK tax resident and/or was UK tax resident in any of the previous three tax years.
- The individual was UK domiciled under common law at any point in the previous three years.
- The individual was born in the UK, had a UK domicile of origin, is now UK tax resident, and was UK tax resident in at least one of the previous two tax years.
Individuals who are neither domiciled nor deemed to be domiciled in the UK are subject to UK IHT only in respect of assets situated in the UK. Under the UK domestic rules, however, individuals who are either domiciled or deemed to be domiciled in the UK are subject to UK IHT on the value of all their assets, wherever in the world they are situated.
Estate duty treaties
The UK has a number of tax treaties with other jurisdictions, and these serve, in very broad terms, to allocate taxing rights between the jurisdictions and so provide clarity and tax relief in cases where otherwise two layers of tax might arise.
The 1956 Estate Duty Treaty between the UK and India contains provisions that relate directly to UK IHT and which can give rise to a position for Indian-domiciled individuals that is beneficial when compared with that of individuals who are domiciled in most other jurisdictions. Most notably, this treaty provides that UK IHT shall not be charged on the value of property outside Great Britain on the death of a person who at the time of their death was not domiciled in Great Britain but was domiciled in India. Crucially, this treatment applies regardless of whether or not the individual is deemed to be domiciled in the UK under the UK domestic rules.
The provisions in the 1956 Estate Duty Treaty have some limitations. They only apply on death, and so they are not applicable where lifetime IHT arises. In addition, they do not apply where the non-UK property passes under a “disposition or devolution regulated by a law of some part of Great Britain”. Despite these limitations, however, the provisions can be beneficial for Indian domiciled individuals who have become long-term UK residents while retaining non-UK assets.
A limited number of other tax treaties have similar provisions, and it is crucial for individuals to properly consider any relevant tax treaties when considering their IHT position. Please do get in touch with our private client tax experts here at Moore Kingston Smith if you would benefit from any advice in this area.