Estate Planning Opportunities Arising out of the India/UK Double Tax Treaty

The 1956 double tax treaty between the UK and India confers considerable inheritance benefits on long term UK residents with an Indian domicile. This article explores how such individuals may plan their affairs to maximise treaty benefits and mitigate UK inheritance tax on their estates.

The Default Position

Individuals with a UK domicile are subject to UK inheritance tax on their world wide assets. Advice should always be taken on whether or not assets are located in the UK or not, for this purpose.

Individuals with a non-UK domicile are subject to UK inheritance tax only on their UK situs assets and not  on their non-UK situs assets. UK inheritance tax will, however, be chargeable on their worldwide assets if they (i) acquire a domicile of choice in the UK; (ii) become deemed domiciled in the UK by spending at least 15 of the last 20 tax years in the UK; (iii) elect to be taxed as UK domiciled; or (IV) are formerly domiciled residents (individuals born in the UK with a UK domicile of origin and are resident in the UK).

UK/India Treaty Benefits

The UK/India double tax treaty largely overrides the UK concept of deemed domicile.

Provided the following conditions are met, UK inheritance tax is chargeable only on UK situs assets and Indian estate tax applies to the rest of the individual’s estate (potentially in addition to any local inheritance tax in the jurisdiction where the asset is located or where the testator is resident, where relevant):

  • the testator was not UK domiciled at the time of his death AND was Indian domiciled (under Indian laws); and
  • the testator’s UK will relates only to his UK situs assets and non-UK will(s) are in place with respect to non- UK situs asset(s).

Given that Indian estate duty is currently 0%, there are opportunities to transfer certain assets outside the UK, such as portfolios of investments, thus removing them from the UK inheritance tax net. This requires careful consideration and does not work for all asset classes, so advice should always be taken.

The 1956 double tax treaty between the UK and India confers considerable inheritance benefits on long term UK residents with an Indian domicile. This article explores how such individuals may plan their affairs to maximise treaty benefits and mitigate UK inheritance tax on their estates.

How Far Does the Treaty Extend?

The treaty extends to inheritance tax on death and does not cover lifetime inheritance tax charges including the following:

  • failed PETs where the donor has not survived the gift by 7 years;
  • transfers into trust and annual trust charges.

The type of planning that can be carried out, therefore, is limited and each client’s personal circumstances need to be individually analysed.

What Are the Risks?

The UK/India double tax treaty has been in force since 1956, so over 62 years. In due course it may be renegotiated but at present it remains very much in force.

The Indian Government has been considering raising the rate of estate tax and has threatened to do so several times. It has, however, never done so. In the event that estate duties in India do increase above 0%, it is highly unlikely the rate will be set at 40%, so, on that basis, the treaty would still be of benefit to long term UK residents.

How Can Michelmores Help?

This is a complicated area of planning and failure to pay attention to detail can have disastrous consequences, such as UK inheritance tax being chargeable on an entire estate (rather than a portion) resulting in a far higher inheritance tax charge than anticipated. Advice should, therefore, always be taken.

Michelmores’ leading private wealth team regularly advises on UK estate planning matters using India/UK double tax treaty benefits, as well as general reliefs and exemptions available under UK laws. We co-ordinate all relevant documentation (including those from Indian lawyers) so clients have one point of contact and are able to act as executors to ensure that the estate is administered appropriately and the correct amount of inheritance tax is paid.

For more information please contact Raj Patel, Partner in the Private Wealth team on raj.patel@michelmores.com or +44 (0)207 6594 624.