If you are considering investing in the United Kingdom, whether through the purchase of a property or investment in a business, it is important to take into account UK and Indian tax issues and to structure any investment in a tax efficient manner.

Determining UK tax liability

When a person comes to live in the UK or simply makes an investment here they should take into consideration their domicile and residence status for UK tax purposes. Liability to UK taxation is determined by a person’s residence and domicile status.

What is residence?

Broadly speaking an individual is resident in the UK if he spends 183 days or more in the UK during the tax year, arrives with the intention of remaining in the UK permanently or to live or work for three years or more or spends less than 183 days in the UK during the tex year but other factors, looked at in the round, lead HMRC to assert UK residency. Such other factors would include: availability of accomodation in the UK, business ties in the UK, family ties in the UK and social ties in the UK.

Up until 6 April 2009 there used to be a rule that if an individual visiting the UK spent 90 days or less in the UK per year, on average over a four year period, then they would be non-UK resident. HMRC have withdrawn the guidance in which this, their own interpretation of the rules, was set out and replaced it with a ‘holistic’ approach to residency, claiming that “many different factors will determine whether you are resident in the UK during a tax year”.

Someone who comes to live in the UK or who intends to spend time in the UK should always take advice on their UK tax residence position.

What is domicile?

A person may have many places of residence, but may only have one domicile for UK tax purposes. Broadly speaking a person is domiciled in the place in which they have their permanent home. At birth a person usually obtains the domicile of their father, and can change it by foresaking their former domicile and intending to reside indefinitely in a new place in which they are physically present. A person who is not UK domiciled (as will be the case with most Indian citizens) can benefit from favorable tax treatment in the UK even when resident here.

Taxes in the UK

There are four principal direct taxes which affect individuals:-

  • Income Tax – This is a tax on an individual’s income. The maximum rate of income tax will be 50% from 5 April 2010.
  • Capital Gains Tax (CGT) – This is a tax on capital gains made when assets are sold (or gifted in certain cases). With effect from 6 April 2008, the maximum rate of CGT is 18%.
  • Inheritance Tax (IHT) – This is a tax on the value of a persons estate on death and on certain lifetime gifts. Assets over the IHT allowance, currently £325,000, are taxable at 40% on an individual’s death.
  • Stamp Duty Land Tax (SDLT) – This is a tax payable when you purchase land in the UK. The maximum rate of SDLT is 4% and is payable by reference to the purchase price.

UK tax liabilities for Indian investors

I am purchasing a property in the UK but will remain non-UK domiciled and not UK resident…

Income Tax: A person who is non-UK domiciled and not resident in the UK will only be liable for UK income tax on any UK source income (for example any rental income that is received). The payment of UK income tax on rental income can be dealt with under the Non Resident Landlord Scheme (NRLS) under which the letting agent will arrange payment of the tax liability for you. A credit should be available for any Indian tax paid on the same income.

Howver, some people choose to opt out of the NRLS as the tax is calculated on gross rental income without deduction for allowable costs such as insurance, maintenance/repair costs, agent’s fees, legal and accountancy fees and most importantly mortgage interest. We can assist with the election to opt out of the NRLS, the filing of UK tax returns declaring net rental income and the payment of tax.

CGT: You will have no liability for UK CGT. You may have a liability for Indian tax when the property is sold.

IHT: You will be liable for IHT on any assets located in the UK (for example, a property) on death.

I may move to the UK or become resident…

A UK resident is liable to UK tax on their worldwide income and capital gains. This rule is however modified for residents who remain non-UK domiciled.

Currently UK residents who are non-UK domiciled (which many Indian citizens living in the UK are) can elect for their non-UK income to be taxed on a remittance basis; this exempts non-UK income and gains from UK tax unless remitted (brought into) to the UK. This is known as the remittance basis of taxation.

However, with effect from 6 April 2008 for an adult resident in the UK for seven out of the preceeding nine tax years, a £30,000 annual levy is payable when claiming the remittance basis (except for those with a de minimis level of annual income and capital gains of £2,000).

An individual moving to the UK to become resident here should take advice on minimising his UK tax liability before he comes to the UK. Purchasing a property may have implications for your UK tax residence status and can lead to you becoming resident sooner than you would otherwise.

Structuring UK property purchases

When buying a UK property an Indian citizen should take advice about his UK tax status and how to minimise liability to UK taxation in respect of the property.

A number of ownership structures can be considered:

  • Purchase the property in your own name:
    • This option has the advantage of simplicity: you will be named as the legal owner of the property on HM Land Registry.
    • The value of the property will however be liable to IHT when you die if its value exceeds the IHT allowance. However, if you purchase the property in your own name, liability to IHT may be reduced or avoided by borrowing against the value of the property, dividing ownership between your family members (each of whom will have their own IHT allowance), or by taking out life insurance and placing the death benefit in trust.
    • You will be liable for UK income tax on the rental income you receive from the property. You will be able to deduct any interest costs on a mortgage from the rental income for UK tax purposes.
    • You will not be liable for CGT when you sell the property unless you are UK tax resident.
    • You should consider making a UK Will to deal with the devolution of the property on death (subject to considering IHT issues).
  • Purchase the property through a non-UK resident company
    • If the potential charge to IHT is significant you could consider owning the property through a non-UK resident company which will become the legal owner of the property. The company could be located in a low tax jurisdiction (such as Jersey or Mauritius). In this scenario the company is the legal owner registered at HM land Registry.
    • This will avoid IHT on death.
    • The company will remain liable for UK income tax on rental income.
    • You will not be liable for CGT when you sell the property unless you are UK tax resident.
  • Purchase the property through a non-UK resident company owned by a trust
    • For very valuable properties where there is a significant liability to IHT, and/or where you may become UK tax resident, and/or where you have significant international assets to manage, consideration could be given to establishing a non-UK resident trust to own the non-UK resident company which owns the property.
    • Under a trust, trustees are appointed in a favourable low tax jurisdiction who manage the assets you give them for the benefit of you and your family.
    • The use of a trust can provide IHT and CGT benefits. It can also assist with asset protection (against divorce, bankruptcy, misuse of assets by young family members etc), easy transfer of assets during lifetime and on death and provide a confidential structure for the benefit of your family under which assets can be managed.

This bulletin is a general outline of certain aspects of the UK tax system. Specific advice should always be sought to take into account an individual’s particular circumstances and assets, and also the tax regime in force in the UK at the time. The UK tax rules are changed periodically by legislation and case law. The individual should also consider the tax regime in their home jurisdiction. It may be necessary to liaise with tax advisors there, and to take into account the effect of any relevant double tax treaty when considering how to minimise an individual’s overall tax liability. The Indian tax consequences of any UK planning in particular must always be considered to avoid any double taxation. Wedlake Bell do not provide Indian tax advice but work with Indian advisers to take into account Indian tax issues.