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  • Katherine Bullock

Thinking Big – Offshore Tax 2021 – The advantages of domicile in India (or Pakistan or Italy)

There is an interesting quirk about certain old estate duty treaties – the treaties with India, Pakistan, Italy, France for example – that can have a very significant and beneficial impact on individuals who originate from those countries. Whilst the taxation regime for non-domiciled individuals has been through seismic changes over the last decade, this remains the case (see for example HMRC’s response to the CIOT/STEP queries re the Double Tax Treaty override provisions).

"...a scenario exists whereby the rules regarding deemed domicile can be overridden..."

This post is intended to provide an introduction to a very complex subject. If you want to understand it fully, we will be covering it in depth at the FCTC Offshore Tax Conference on 27 April. I have not set out every nuance here and I have certainly over simplified. However, I hope that there is sufficient to prompt anyone interested to find out more and anyone who might be affected to seek advice.

Let’s start with a refresher. In broad terms, assets that are ‘located’ outside the UK are only subject to IHT if the owner is UK domiciled. Where, exactly, assets are ‘located’ for the purposes of this distinction is a complicated subject, but for our purposes it is sufficient to simply distinguish between UK-located assets and non-UK-located assets. Domicile is another complex matter but suffice to say that it is not necessarily where an individual is resident, born or is a citizen. As a rule of thumb a good place to start is the place where their father was domiciled when they were born. More relevant to our purposes is the UK ‘deemed domicile’ regime, whereby (and again in very broad terms) an individual who is domiciled outside of the UK, but who was tax resident in the UK for at least fifteen of the last twenty years is treated as having a domicile in the UK. Our hypothetical deemed domiciled person will therefore be subject to IHT on their worldwide estate, even their non-UK assets. I am going to ignore trusts here and focus on the Treaty between the UK and India for ease of explanation.

Thanks to the 1956 Treaty between the UK and India, a scenario exists whereby the rules regarding deemed domicile can be overridden. If an individual is legally domiciled in India at the time of his death, then the treaty specifies that no IHT will be applied to any part of the estate which is outside of the UK, but instead that property will be dealt with and taxed according to whatever non-UK law might apply. While this is, indeed, exciting news considering that it represents a complete relief from IHT on non-UK assets for anybody domiciled in India at the time of their death, there are a few caveats to keep in mind. Indian law has different requirements and definitions to UK law, and here we are especially interested in the fact that under Indian law, a person is considered to be resident in India if they spent 182 days or more there, or 60 or more days that year with 365 or more days over the last four years in total. They become domiciled either by virtue of being born in India and never forming an intention to reside elsewhere and never return, or by residing in India for an entire year and submitting a written declaration of their desire to acquire Indian domicile. Therefore, it is important to note that it may be possible for somebody to be considered to be domiciled in India by UK law but not by Indian law, and vice versa. The important thing is that they are considered by Indian law to be domiciled in India, and that they are only deemed domiciled in the UK under UK law. This exception will fail if the person is actually domiciled in the UK at their time of death.

As a result of the operation of the treaty, the person’s deemed UK domicile is overridden and their non-UK assets will not be subject to UK inheritance tax. Instead their assets will be dealt with by the operating law of whatever will governs those assets. It is critical, therefore, that a will be created under non-UK law. If assets are devolved under a UK will, UK law will still apply, and thus so will IHT. However, Indian assets being distributed under an Indian will would be free of any UK IHT, as would Portuguese assets under a Portuguese will and so on. However, provided that the person has acquired domicile in India, and their assets are dealt with by a governing law outside of the UK, the treaty will apply to spare any non-UK assets from the effects of being deemed domicile in the UK.

A final note of caution - be aware that certain exceptions apply. The treaty exemption will only apply to the person’s estate, and thus lifetime transfers such as gifts made during the individual’s life near to the date of the death will not be treated in this way. Lifetime transfers into or IHT charges on trusts will also not be exempt, and so IHT may still need to be paid on those. As always, the situation should be examined carefully in its individual circumstances to ensure that all variables are accounted for.

The treaty exemption can be an exceptionally useful tool in an estate planner’s toolbox provided that all the conditions are fulfilled and represents a very potent relief from the UK’s IHT regime for those able to take advantage of it. As always, there is a lot of complexity which lies outside the scope of this article, but I hope that this has provided some insight that you will find useful and inspire further research!


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