Indian and Pakistani Domiciled Individuals – Are IHT Changes Coming?

Is it time for Indian and Pakistani domiciled individuals to breathe a sigh of relief?

The taxation of non-domiciled individuals has been a hot topic over the last few years, and has been at the forefront of many people’s minds since the 2024 Spring Budget, where a raft of changes were announced effectively abolishing the tax benefits available to many individuals who do not originate from the UK.

The new Labour government have recently launched a consultation on the proposed changes to the non-domiciled regime, which we have been fortunate to be able to feed into on behalf of our clients, and they have also released some limited guidance on their plans.  Whether they will have time to legislate the changes by 6 April 2025 remains to be seen, and there is still significant uncertainty over certain aspects of the changes such as the 12% temporary repatriation rate for previously unremitted foreign income and gains (FIG) – which could be increased. We have summarised the most recent non-domicile proposed changes. 

However, those with an Indian or Pakistani domicile may be left wondering what the changes could mean for them, due to unique agreements between the UK and those jurisdictions which in certain scenarios offered them significant estate planning advantages under the existing regime.

What is an individual’s domicile?

Domicile is a common law term which can broadly be defined as the country that a person considers as their permanent home. Note that this is completely separate from tax residence, which instead follows physical days of presence in any jurisdiction.  We have previously discussed how an individual determines their domicile.

What benefits were available to Indian and Pakistani domiciled individuals?

With effect from 6 April 2017, individuals who are non-UK domiciled under common law are “deemed” to be UK domiciled for tax purposes if they have been UK resident for at least 15 of the prior 20 tax years. Deemed domiciled individuals can no longer benefit from the remittance basis of taxation, and are subject to UK Inheritance Tax (IHT) on their worldwide assets (broadly speaking, non-domiciled individuals are ordinarily only subject to UK IHT on UK-situs assets).

However, where an individual is Indian or Pakistani domiciled under local law (and non-UK domiciled under UK law), the position may differ.

The Double Taxation Relief (Estate Duty) (India) Order 1956 and The Double Taxation Relief (Estate Duty) (Pakistan) Order 1957 resulted from mutual agreements with those territories that individuals who are domiciled in India or Pakistan should not be subjected to UK IHT on their non-UK assets, and vice-versa.

It should be noted that obtaining this beneficial treatment is not necessarily straightforward and it is vital that the financial affairs of those with an Indian or Pakistani domicile are structured correctly – in particular, any non-UK assets should pass via a non-UK Will.

How do the proposed changes impact this?

As noted above, the Labour government have confirmed they will continue with the plans to scrap the non-domicile status for tax purposes, and move to a residence-based system of IHT – it is expected that individuals will potentially be subjected to UK IHT after 10 years of residence rather than the previous 15 year deemed domicile rule.

Whilst this could bring more non-domiciled individuals the UK IHT net than under the current regime, the agreements with India and Pakistan will continue to override domestic legislation.  Those agreements are based on the common law principles of domicile in each jurisdiction, whereas the anticipated changes to be made by the government relate to tax legislation only.

As such, it is highly likely that the position for Indian and Pakistani domiciled individuals will remain the same, and they may not be subjected to UK IHT on their overseas assets provided they structure their affairs correctly.

Should I be considering my options before 6 April 2025?

In a word, yes.  There are a number of changes on the horizon, and there may be more to come in the new government’s first Budget.  For non-domiciled individuals (whether Indian, Pakistani, or anywhere else), it is vital to ensure your financial affairs are structured correctly and that you review your options with a suitably experienced adviser before any changes take effect.

If you would like any further information on the proposed tax changes and what they could mean for your bespoke circumstances, please don’t hesitate to contact Gunhild Dam, Tom Andrew, or your usual AAB contact.