Indian nationals claiming non-UK domicile status - key issues

In general, IHT is charged at 40% on death on the value of a non-UK–domiciled individual’s UK assets, and on the value of the worldwide assets of a UK domiciled (or deemed domiciled) individual. However, Indian-domiciled individuals may enjoy beneficial treatment under the terms of the current UK-India Capital Taxes treaty, which can override the UK deemed domicile rule and exempt certain non-UK assets from tax on death.

If a taxpayer who is domiciled within the UK dies here, they are liable to IHT on all their assets regardless of where they are situated. However, under the UK/India Treaty of 1956, the current UK deemed domicile rule may be ignored when the individual is also domiciled in India under general law.

Therefore, if an individual dies while domiciled in India but they are deemed to be domiciled in the United Kingdom for UK IHT purposes at death, the estate at death will not suffer UK IHT on any property which is located outside the UK and which passes under a disposition or devolution regulated by a law other than that of Great Britain.

However, this does not provide complete protection from UK IHT. It does not exempt lifetime IHT charges which can sometimes arise i.e., immediately-chargeable gifts or failed potentially exempt transfers (PETs), where the individual has died within seven years of making a gift. In addition, there is no exclusion where UK residential property is owned via a non-UK entity, such as a company or partnership.

How the announced April 2025 changes may impact this?

There have been no specific announcements in relation to how the proposals to abolish non-dom status might impact the UK-India Double Tax Treaty. The way that the reforms will impact IHT have not yet been addressed.

To crack down on perceived tax evasion and avoidance, the Organisation for Economic Cooperation and Development (OECD) established the Common Reporting Standard (CRS). The CRS is a multinational agreement which calls on participating countries to obtain financial information from their financial institutions and automatically exchange that information with other jurisdictions.

Both the UK and India were early adopters of the CRS which means the flow of data between the two countries is now well advanced.

What are HMRC looking into?

HMRC may wish to confirm that Indian bank account income, investment gains, an individual’s domicile position and property held in India have been reported correctly in the UK.

There are three main types of bank accounts which are available for overseas investors in India or Non-Resident Indians (“NRIs”):

• Non-Resident Ordinary accounts (“NRO”);
• Non-Resident External accounts (“NRE”);
• and Foreign Currency Non-Resident accounts (“FCNR”)

NRE accounts in particular offer an attractive proposition for overseas investors (those not living in India). Not only do they typically offer high rates of interest, but there is also the added benefit that any interest earned is tax-free. This is the Indian government’s way to entice inward investment for India’s future economic development.

UK Tax implications

In generic terms, UK resident and domiciled individuals are subject to tax on their worldwide income and gains on an arising basis; this is regardless of the tax-exempt status in India. Foreign Tax Credit relief is available in respect of tax deducted at source on NRO accounts. However, tax credit relief is restricted to 15% in accordance with the UK-India Double Tax Agreement (“DTA”). It is therefore important that UK residents inform their Indian banks of their NRI status so that the tax deducted at source is restricted to 15% and not the standard 30%.

Currently, UK resident individuals who are non-domiciled in the UK (and not deemed domiciled in the UK) can elect to be taxed on the remittance basis of taxation. As a result, UK tax is only payable on foreign income or gains that are remitted to the UK. Where the total unremitted foreign income and gains is less than £2,000 the remittance basis of taxation applies automatically.

Could Tax Sparing Relief help you?

NRE and FCNR accounts are tax-exempt to incentivise inward overseas investment to India.

The issue however is that this tax-exempt incentive is lost as UK resident individuals are taxed on an arising basis on their worldwide income and gains. So, a UK resident individual who is a higher-rate taxpayer suffers no Indian tax liability on any interest earned in an NRE account but is liable to a 40% tax charge in the UK. No Foreign Tax Credit relief would appear available as there is no foreign tax to relieve.

To overcome this issue, the UK-India DTA allows for a specific notional tax credit relief known as Tax Sparing relief. The idea is to give UK resident investors in India a measure of relief where they have been offered a tax incentive. This notional tax credit relief is restricted to a period of ten years after the exemption (from Indian tax) or reduction is first granted.

Tax Sparing Relief is a little-known relief which can be valuable when determining the UK tax position of UK resident individuals who hold Indian bank accounts. It appears not only in the UK-India DTA but in DTA’s between the UK and other countries too, including Bangladesh, Kenya, Mauritius, Pakistan, and Sri Lanka.

Undisclosed Indian bank interest

Understanding the UK tax implications of income arising overseas, including consideration of any reliefs that may be available, can often be complex. Failing to take appropriate advice can be costly in terms of intrusive tax investigations and increased financial penalties.

UK resident individuals with bank accounts in India (or overseas) are advised to seek professional UK tax advice to understand their UK position. Where a disclosure to HMRC is required in respect of historic UK tax liabilities individuals can use HMRC’s Worldwide Disclosure Facility (“WDF”).

Coming forward voluntarily can reduce the exposure to penalties. Under HMRC’s Requirement To Correct (“RTC”) regime, Individuals who failed to correct (known as a “Failure to Correct”) their UK tax position and are approached by HMRC in respect of undisclosed overseas income, for example linked to India, could be subject to penalties of at least 150%.