Double tax treaties: guidance for Indian and Pakistani individuals living in the UK

Double tax treaties: guidance for Indian and Pakistani individuals living in the UK

Are you from India or Pakistan and living in the UK? You may be able to take advantage of a unique estate planning opportunity available because of the unusual terms of the double tax treaty the UK has in place with each of these countries.

How can Indian and Pakistani individuals benefit from their country's double tax treaties with the UK?

Under the general principles of UK tax law, individuals are ordinarily treated as being 'domiciled' in the UK (for all tax purposes) once they have been tax resident in the UK for at least 15 of the last 20 tax years. From an inheritance tax (IHT) perspective, becoming UK deemed domiciled as a result of long term residence is unattractive as it introduces with it an exposure to IHT on all assets irrespective of where in the world they are located. Given that IHT is charged at a rate of 40% this can result in a large UK tax liability on death.

The UK's double tax treaties with India and Pakistan are highly unusual because they contain provisions in them that effectively mean that (provided certain conditions are met) an Indian or Pakistani individual's IHT exposure can always be limited to the value of their UK assets only. This is irrespective of the number of years that individual has been resident in the UK.

What conditions must be met to access these benefits?

The following conditions must be met on death to avoid exposure to UK IHT on non-UK assets:

  • The individual must not be domiciled in the UK under English common law – This needs to be looked at very carefully where there has been long-term UK residency. In very broad terms, non-domiciled individuals do not intend to live in the UK on a permanent or indefinite basis. The facts of each case need to be reviewed very carefully and we would usually recommend a domicile statement is signed as contemporaneous supporting evidence. 
  • The individual must be domiciled in India or Pakistan under local law in the relevant jurisdiction – This is an important requirement; therefore we would help you get a local legal Opinion, as the concept of domicile in India and Pakistan is slightly different to that of the UK.
  • The individual must have held assets outside the UK – This is a question of fact; for those people that meet all other criteria, you should seek advice as it will often be sensible to ensure as much wealth as possible is held outside the UK in order to benefit from the special IHT protections offered by the double tax treaty provisions referred to above.
  • The individual’s non-UK assets must not pass under ‘a disposition or devolution regulated by the law of any part of the UK’ - This means when creating an estate plan that is designed to take advantage of the double tax treaty provisions outlined above, non-UK assets should pass under a non-UK law Will. Your legal team can ensure this is achieved by liaising with advisors in other jurisdictions and carefully drafting the UK and non-UK Wills. 

As can be seen from the above, if the treaty requirements are met, Indian and Pakistani individuals have a significant IHT advantage as compared to people from elsewhere in the world. The ability to shelter all non-UK assets from IHT is an important estate planning opportunity that should be explored. 

No other countries have double tax treaties with the UK that offer such generous IHT protections. The Italian and French double tax treaties have some similar provisions but in reality, because of the way in which 'domicile' is defined in those countries, the practical benefits are much more limited when it comes to UK estate planning opportunities.

If you are from India and Pakistan living in the UK and you would like to benefit from the double tax treaties with the UK, please get in touch with a member of the Private Wealth team for more information and advice.