Ensuring Benefit from Available Double Tax Relief
Individuals domiciled in India, Pakistan, France and Italy need to undertake careful planning to take advantage of the operation of double tax treaties between the UK and their country of domicile.
Anyone domiciled in the UK at the date of their death pays UK inheritance tax on all their assets, regardless of where they are situated. Non-UK domiciles only pay UK inheritance tax on those assets located here.
The deemed domicile rules in the UK operate so that anyone who has been tax resident in the UK in no fewer than 17 of the 20 years of assessment ending in the year in which the death takes place, is deemed to be domiciled in the UK for inheritance tax purposes. The effect is to bring long-term residents who remain non-UK domiciled for general purposes into the UK tax net for inheritance tax purposes.
Where an individual is domiciled in India, Pakistan, France or Italy, the UK has entered into tax treaties which result in those domiciliaries being protected from the deemed domicile rules. Under proper advice, the protection can result in significant inheritance tax savings.
India & Pakistan
The Indian rules operate so that someone domiciled in India, but who falls into the UK inheritance tax net by virtue of the deemed domicile rules, will not pay UK inheritance tax on assets located outside of Great Britain, so long as those assets pass under the terms of a will regulated by the law of somewhere other than Great Britain.
To ensure that these rules are complied with, it is vital that Indian-domiciled individuals carry out an audit of their assets and ensure that those located outside England pass under a testamentary instrument governed by non-English law. This kind of audit requires great care, as it is all too easy to revoke one will by the execution of another. Specialist advice may be required in each jurisdiction.
The UK treaty with Pakistan operates in a similar way, and care is needed in the preparation of all wills for individuals wishing to rely on it.
Italy & France
The situation created by the UK/Italian double tax treaty is less favourable than the Indian position, but worth bearing in mind.
On the face of it, anyone who considers themselves domiciled in Italy could be protected from the deemed domicile rules in the UK, thus be able to pass their free estate located outside of the UK, free of UK inheritance tax regardless of the number of years they had resided in the UK. However, the Italian double tax treaty has a peculiarity which deals with individuals who have strong ties to the UK and try to rely on the double tax treaty to protect themselves from UK inheritance tax. In these cases, Italian law may treat the individual as a UK domicile, and this will prevent the individual being protected from UK inheritance tax on their worldwide estate.
Factors to be considered when reviewing the ties an individual had with the UK include permanent residence at death, personal and economic ties, usual living place, and citizenship. French rules are increasingly difficult to fall in with, and need to be reviewed for each individual. It is therefore vital that planning is undertaken during one’s lifetime in order to build up a picture of domicile and ties to different jurisdictions.
If you would like your situation reviewed, please contact our Private Client Department in London.