Indian Domicile and UK Inheritance Tax – A Little Known Advantage

UK Inheritance Tax is levied on the value of a deceased person’s estate at the date of death. If the deceased was non-UK domiciled at the date of death, the Inheritance Tax value of the estate is restricted to the value of assets situated in the UK.

Even if a person is not UK domiciled, there is a rule that can deem them to be UK domiciled if they have been resident in the United Kingdom for at least 15 out of the preceding 20 tax years and at least 1 of the 4 preceding tax years.

Domicile

Many people confuse “Domicile” with “Residence”. They are not the same. Put simply, a person’s Residence status is determined by where they are physically present during a tax year whereas, a person’s Domicile is determined by where they are from and the country they regard as home.

A person acquires a “Domicile of Origin” at birth, usually from his or her father. The Domicile of Origin can be replaced with a “Domicile of Choice” if that person moves to another country with a view to settling there permanently or indefinitely.

A person with a non-UK Domicile of Origin can also be deemed to be domiciled in the UK in the circumstances described above.

People with Indian Domicile - the advantage

The 1956 Estate Duty Treaty between the UK and India confers a significant inheritance tax benefit on individuals with Indian domicile.

Under the 1956 Treaty, if an Indian domiciled individual dies, UK Inheritance Tax will only be levied on UK situated assets and non-UK assets which pass under a UK Will. Any assets situated outside the UK and which pass under a non-UK Will do not suffer Inheritance Tax. This is the case even if that person is deemed to be domiciled in the UK at the date of death. However, if the person has acquired a UK Domicile of Choice the benefit of the 1956 Treaty does not apply.

Clearly, therefore, it is very important for individuals with Indian Domicile to ensure that they do not acquire a UK Domicile of Choice and that they arrange their affairs to ensure that non-UK assets pass under a non-UK Will.

Undisclosed foreign income

Understanding the UK tax implications of overseas income can be complex and costly to overlook. Potential reliefs and exemptions may apply, but navigating these rules requires specialist advice. Failure to comply could result in intrusive tax investigations by HMRC and substantial penalties.

UK residents with Indian or other foreign bank accounts should seek professional tax guidance. If you've previously underpaid UK tax it is imperative that you seek advice at the earliest opportunity

Changes to non-domiciled status to come in 2025

The proposed abolition of non-domiciled status in April 2025 could significantly alter UK tax implications for individuals with overseas income, including those with ties to India. While the exact impact on the UK-India Double Tax Treaty and Inheritance Tax remains unclear, it's essential to make plans ahead of time.

Expert guidance on interpreting the provisions of the 1956 Treaty, domicile status determination, and IHT planning is crucial.

At Friend Partnership we have a wealth of experience in advising on UK Estate planning matters and the interaction of UK Inheritance Tax, Estate Duty Treaties and Domicile. For expert planning and advice please contact David Gillies on 0121 633 2007, e-mail him at david.gillies@friendllp.com, or alternatively, complete the enquiry form below.