BDO Guide: Mitigation of UK Inheritance Tax on overseas assets

Prudent individuals will not only wish to grow the value of their assets during their lifetime but will also wish to protect that value from erosion caused by 'avoidable' costs on succession, such as inheritance taxes. As an individual domiciled in India, are you aware of the favourable IHT treatment that is available under the double tax treaty between the UK and India UK Inheritance Tax (IHT) - rulesIndividuals who are domiciled within the UK are subject to IHT on worldwide assets. In comparison, non UK domiciled individuals are only subject to IHT on UK sited assets.If you have been UK resident for 17 out of the last 20 tax years, you are deemed domicile in the UK and you will be subject to IHT on lifetime transfers of worldwide assets (tax at 20 per cent) as well as all assets within your estate at death (tax at 40 per cent). Under English or Scottish law you can be deemed domicile in the UK, even if for Income Tax and Capital Gains Tax purposes your domicile remains in India.Double Tax Treaty between the UK and IndiaTo prevent property being taxed both here and abroad, double tax treaties exist allowing relief for foreign tax paid. The double tax treaty overrides the IHT deemed domicile rule.The double tax treaty between the UK and India provides appealing treatment for individuals who are domiciled in India but are deemed to be domiciled in the UK for IHT purposes. Assets located in the UK will still be subject to IHT but it will not be payable on assets located outside the UK on death. India does not currently impose death duties.To qualify for this favourable treatment, it is important you ensure that you are firstly domiciled in India under English or Scottish law and secondly, that you are domiciled in India under Indian law.The domicile rules for England or Scotland and India do differ so it is essential that you seek professional advice on taxation in relation to IHT.Not only must you be domiciled in India; but your assets must pass under the terms of a legal Will made under the law of a jurisdiction outside the UK. Thereforeit is important to check you have the correct type of Will in place.A key qualification to the above treatment is that it only applies to offshore assets on death. Lifetime gifts of offshore assets (for example, a transfer to a trust), failed potentially exempt transfers (PETs) of offshore assets (a PET is an outright gift made during lifetime)or gifts where a benefit is reserved (e.g. gifts of property but continued occupation occurs) will still be subject to UK IHT.In summary, the double tax treaty between the UK and India providesplanning opportunities for UK residents who are domiciled in India. However, to qualify for this favourable treatment a number of subtle conditions must be met. Specialist tax and legal advice may be required for each jurisdiction in which an asset is located and to confirm that the individual can be considered as domiciled under Indian law.

BDO is a worldwide professional services network of public accountancy firms, serving national and international clients.The above article was published in India Inc′s print edition of the India Investment Journal launched in April 2014 in conjunction with the Global Wealth Management Conclave 2014.