HMRC have successfully challenged a taxpayer’s domicile of choice on death, such that the taxpayer was unable to benefit from the highly beneficial India-UK Double Tax Agreement (“DTA”). This article discusses how the First Tier Tribunal reached their conclusion and highlights the need to ensure that “intentions” can be substantiated on demand.
Sian Armitage is an Associate Tax Director at Mark Davies & Associates Ltd
Inheritance Tax (“IHT”)
IHT is levied in accordance with both an individual’s domicile status for UK tax purposes and the situs of the assets.
Taxpayers that are either domiciled or deemed-domiciled in the UK are generally subject to UK IHT on their worldwide assets. An individual is deemed-domiciled in the UK for IHT purposes if they have been UK tax resident for 15 out of the previous 20 tax years (formerly 17 out of 20 tax years)).
However, the liability to UK IHT for individuals that are neither domiciled nor deemed-domiciled in the UK is limited to their UK assets only.
In both cases, and with the exception of various reliefs and allowances including a nil rate band of £325,000 per person, IHT is charged at a flat rate of 40% upon death.
Shah v HMRC (2023) (“Shah”)
Following the outcome of Coller (2013), a recent First Tier Tribunal (“FTT”) decision in the Shah case has re-affirmed the importance of an individual’s “intention” being more than vague plans without substance when determining one’s domicile status.
Shah also raised an interesting discussion over IHT double tax treaties that individuals can take advantage of, and whether reliance should solely be placed on the application of those treaties.
In the Shah case, Ameet Shah (as executor of the estate of Anantrai Maneklal Shah deceased) (“AS”) contended that Anantrai Maneklal Shah (“AMS”), the deceased, had retained their non-UK domicile of origin and had not acquired a domicile of choice in England and Wales during his lifetime.
Ordinarily, whether AMS had acquired a domicile of choice at the time of his death would not have been an issue as he would have been deemed-domiciled for IHT purposes under the long-term resident provisions and his full estate would have been within the scope of UK IHT.
However, under the UK-India double tax treaty, non-UK assets within the estates of individuals who are domiciled in India at the time of their death, are subject to Indian estate taxes and are outside the scope of UK IHT.
For the purposes of the treaty, the deemed-domicile provisions are disregarded, and a taxpayer’s actual domicile is considered. Therefore, it was necessary that AMS was domiciled in India at the time of his death, and he had not acquired a domicile of choice in England and Wales for the treaty to apply.
HMRC challenged AS’s position, and the FTT agreed concluding that the AMS had settled and intended to remain in England and Wales from 1973, thus acquiring a domicile of choice in England and Wales that had not been abandoned before the time of his death. Consequently, the FTT did not find the need to consider the role of the UK estate tax treaties with India and Pakistan, as they would not apply.
Background Facts
Born in Karachi in 1929, AMS’s domicile of origin was (at time time) in British India (now Pakistan since the Partition of India in 1947).
AMS acquired British citizenship in 1961, giving up his Indian citizenship at the same time (at that time, dual citizenship was not permitted in India). He moved to the UK in 1973, with his wife and children, and his mother. From his arrival, AMS worked as a pharmacist until at least 1997, and he continued to reside in England until the time of his death in 2016.
AMS sold his house in December 2010, moving into a rented flat shortly after, and later moving into his son’s flat in 2012. In addition, AMS invested funds into a non-UK company in 2012, which invested in UK commercial property.
In 2014, AMS made two wills, one under English law for UK assets and the other under Indian law for non-UK assets. In this year he also registered as an Overseas Citizen of India.
AS claimed that his father, AMS, intended to relocate to India, but his plans were delayed due to his desire to put the family in a good financial position, his daughter’s serious illness (and subsequent death) and his wife’s death.
After, AMS’s wife death, AMS became seriously ill, but still intended to move back to India once he was well enough to do so.
Given AMS’s domicile of origin was not in the UK, HMRC needed to prove that AMS had firstly acquired a domicile of choice in England and Wales, and secondly that he had maintained this domicile of choice up to the time of his death.
The FTT ruled in favour of HMRC, outlining that AMS ‘settled permanently’ in England and ‘had, at most, only a vague and floating idea of moving to India at some point’.
The FTT found that AMS held no significant connections to India, and there was no evidence submitted to suggest that he had made any practical advancements in relocating to India. Retirement to India was merely a possibility that never materialised, and the FTT considered that there was no explicit intention for AMS to ‘have abandoned his domicile of choice in the UK’. The FTT noted that AMS registered as an Overseas citizen of India rather than acquiring Indian citizenship, and that no material financial arrangements had been made in anticipation of a proposed move to India.
Lessons to Learn
FTT’s conclusion reiterates the importance of a taxpayer displaying clarity with their intentions, as well as the importance of taking the necessary steps to maintain a non-UK domicile status. Similar to the Coller case, the outcome could well have been different had AMS relocated to India prior to his death (or taken some practical steps to demonstrate that this was his intention). However, HMRC’s triumph in both Coller and Shah is essentially founded upon the fact that, in both cases, the taxpayers’ intentions were both unachieved and unsubstantiated.
Importantly, Shah v HMRC highlights that courts will look at an array of factors across an individual’s life when considering their domicile status, and any non-UK domiciled individual with the desire to maintain a non-UK domicile should continually review their status and plan their affairs around any future departure from the UK.
This case serves as an important reminder to long-term UK resident individuals who wish to take advantage of the UK estate tax treaties (e.g. those in place with India and Pakistan) to take careful steps in ensuring they maintain their non-UK domicile status. Furthermore, it is worth considering whether additional tax planning that may be relatively simple prior to becoming deemed-domiciled in the UK would be a sensible ‘insurance’ against potential change of circumstances or plans not coming to fruition.
Overall, this case underlines the rigorous approach that HMRC are taking when assessing an individual’s domicile status. It acts as a stark warning to any non-UK domiciled individuals to ensure their domicile status is documented at all times, particularly after significant life events, and that sufficient evidence is readily available to prove such status.
If you require any assistance regarding any of the matters discussed in this article, please contact Sian Armitage.