Estate planning – could the 1956 UK / India double tax treaty provide inheritance tax relief for you?

Some individuals of Indian origin may find themselves subject to peculiarities held within the 1956 double tax treaty between the UK and India (the Treaty) in relation to inheritance tax (IHT). A treaty which more than six decades on, still remains in place.

As background, the basic IHT position for a non-UK domiciled individual (non-dom) is:

  • all non-doms are subject to IHT on their assets located in the UK. ‘Location’ in this context refers to specific legal rules, not covered in this article; 
  • a non-dom’s assets located outside the UK are not subject to IHT until the non-dom is domiciled in the UK under general law or becomes deemed domiciled in the UK;
  • an individual is deemed domiciled if they were resident in the UK for at least 15 out of the previous 20 tax years. An individual can lose their deemed domicile status if they are non-UK resident for six complete tax years; and
  • foreign assets transferred to a non-UK trust by an individual before they become deemed domiciled fall outside the IHT net, provided the trust is not tainted after the individual becomes deemed domiciled.  

The Treaty

If a person has retained sufficient connections with India which amount to ‘domicile’ under Indian law, the UK’s deemed domicile rules may be overridden by the Treaty. If this is the case, the individual will remain potentially exposed to IHT on UK located assets only.

There are specific requirements which need to be met in order for an individual to benefit from the provisions of the Treaty when they pass away, and which should be taken into consideration when estate planning is undertaken.

Domicile – the domicile of the deceased must be considered under the laws of the UK and India; with specialist legal and tax advice needed in India and the UK. For the Treaty to bite, the deceased must have been domiciled in India under Indian law at the time of death.

However, the legal concept of domicile in India and the UK may, or may not, align. For example, under English law the individual may be viewed as domiciled in India, but they may not be considered to be domiciled in India under Indian law. Evidence of domicile under the local Indian law needs to be produced; this might take the form of a certificate from the Indian tax authorities. 

If an individual has an actual domicile in the UK under the laws of England and Wales (or the laws of Scotland or Northern Ireland, as the case may be), Treaty protection does not apply even if the individual is simultaneously domiciled in India as a matter of Indian law.

Assets – the assets must be located outside the UK.  

Governing law – in order for the Treaty to apply, the Will that deals with the individual’s non-UK located property must be governed by a law outside Great Britain (e.g. if assets are located in Guernsey, a Guernsey Will might govern their disposal). 

What does the Treaty exemption cover? 

The treaty exemption primarily applies to the deceased individual’s free estate.

The exemption does not apply to lifetime transfers, for example:

  • gifts made within seven years of the individual’s death; 
  • transfers into trusts made during the individual’s lifetime; and 
  • IHT charges on trusts.

Usage

There is always the possibility that the Treaty may be withdrawn or amended, especially bearing in mind that India does not currently impose death duties. However, until that time, for certain individuals the Treaty might be a useful tool in their estate planning armoury, providing IHT relief on death in relation to assets located outside the UK.

How can RSM help?

If you would like more information please get in touch with Sophie St John, or via your normal RSM contact.

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