Are your UK and India tax affairs in order?

by | Jul 26, 2022

HMRC are currently writing to individuals who they think may owe UK tax due to ‘offshore’ income and/or gains.   This includes individuals who have both UK and India tax affairs. If you have received this letter, don’t panic… instead seek professional advice.

So, what do we know about India’s tax transparency?

To reduce “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 exchange that information with other jurisdictions.

The status of the CRS differs from country to country.  Early adopters (2017) included the following countries:  Anguilla, Argentina, Belgium, Bermuda, British Virgin Islands, Bulgaria, Cayman Islands, Colombia, Croatia, Cyprus, Czech Rep, Denmark, Estonia, Faroe Islands, Finland, France, Germany, Gibraltar, Greece, Guernsey (Channel Islands), Hungary, Iceland, India, Ireland, Isle of Man, Italy, Jersey (Channel Islands), Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mexico, Montserrat, Netherlands, Norway, Poland, Portugal, Romania, San Marino, Seychelles, Slovakia, Slovenia, South Africa, Spain, Sweden, Turks and Caicos Islands and the United Kingdom.

These were followed by Andorra, Antigua and Barbuda, Aruba, Australia, Austria, Azerbaijan, Bahamas, Bahrain, Barbados, Belize, Brazil, Brunei Darussalam, Canada, Chile, China, Cook Islands, Costa Rica, Curaçao, Dominica, Greenland, Grenada, Hong Kong, Indonesia, Israel, Japan, Lebanon, Macao, Malaysia, Marshall Islands, Mauritius, Monaco, Nauru, New Zealand, Niue, Pakistan, Panama, Qatar, Russia, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Samoa, Saudi Arabia, Singapore, Sint Maarten, Switzerland, Trinidad and Tobago, Turkey, United Arab Emirates, Uruguay, Vanuatu in 2018; and

Ghana and Kuwait in 2019;

Nigeria, Oman and Peru in 2020;

Albania, Ecuador and Kazakhstan in 2021; and in 2022, Jamaica, Kenya, Maldives and Morocco.

We expect 2023 to include Jordan, Moldova, Montenegro, Thailand, Uganda and Ukraine with Georgia and Rwanda set to follow in 2024.

Both the UK and India were early adopters of the CRS which means the flow of data between the UK and India is now well established.  The CRS results in incoming data being analysed by HMRC to identify individuals where there may be a tax loss.

In reality, what we see is HMRC issuing “nudge” letters to UK resident individuals who have financial links in India.

These letters inevitably prompt an individual to review their UK tax position and ascertain whether there are any undeclared sources of offshore income and gains, for example, from India or any other sources outside of the UK.

What letters are clients receiving, what are HMRC looking for?

Our clients have seen a range of “nudge” letters from HMRC. However, typically we see those that specifically focus on Indian bank account income, investment gains, an individual’s domicile position as well as property that may be owned or held in India.

What are the UK Tax implications, what do you need to do?

As with most UK tax legislation foreign bank account reporting and compliance is not straight forward. Specific tax advice should always be sought based on an individual’s facts and personal circumstances.

You must be clear about your personal residency and domicile status for tax purposes in both, India and the UK as this is a crucial starting point.

It is worth remembering that a UK resident and domiciled individual is subject to tax on their worldwide income and gains on an arising basis; this is regardless of the tax-exempt status in India.

UK resident individuals who are non-domiciled in the UK (and not deemed domicile 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.

Individuals who have been resident in the UK for at least seven of the previous nine tax years will have to pay an annual charge of £30,000 to elect for the remittance basis to apply. The charge increases to £60,000 once UK residency is at least twelve of the previous fourteen tax years.

A claim for the remittance basis of taxation results in a loss of an individual’s UK personal allowance as well as their Capital Gains Tax annual exemption. Where the total unremitted foreign income and gains is less than £2,000 the remittance basis of taxation applies automatically with no loss of personal allowance or annual exemption.

If you are the holder of NRE and FCNR accounts these are tax-exempt to incentivise inward overseas investment to India.

However 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 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.

How does this impact upon you? Do you have 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 and failing to seek appropriate advice can be costly.

We advise all UK resident individuals with bank accounts in India (or other overseas countries) to seek professional UK tax advice so that they can fully understand their UK position.

Where a disclosure to HMRC is required in respect of historic UK tax liabilities individuals can use make use of HMRC’s Worldwide Disclosure Facility.

Anyone coming forward on a voluntary basis to made a disclosure can reduce their exposure to penalties. A taxpayer can come forward voluntarily under the Requirement to Correct Regime.

Individuals who fail to correct their UK tax position and are who are then approached by HMRC in respect of undisclosed overseas income, (for example linked to India), could be subject to penalties of at least 150%.

If you would like to speak to a member of ABG’s tax team in respect of declaring an overseas income and/or gain, please contact us on 020 7330 0000.

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