Rishi Sunak’s wife, Akshata Murty, is worth at least £750m. On the face of it, their family would stand to gain by £300m if inheritance tax was abolished. However Ms Murty likely is an accidental beneficiary of an obscure loophole, which means her wealth will always be exempt from inheritance tax.
Akshata Murty holds 1.05% of the shares in her father’s IT company, Infosys.1See Infosys’s most recent disclosures, page 3, about 2/3 of the way down The company’s current market capitalisation is $74bn which implies – ignoring Ms Murty’s other assets – that she is worth around £750m.
The position for UK domiciled individuals
If a UK domiciled individual held £750m of shares then, when they and their spouse died, their estate would usually have an inheritance tax bill of around £300m.
The position for non-doms
There was a fuss last year about Akshata Murty being a “non-dom” – meaning that she was born abroad and (broadly speaking) regards her permanent long-term home as being in India, not the UK. This enabled Ms Murty to historically claim the “remittance basis”, which means she wasn’t taxed in the UK on her Infosys dividends. However she agreed last year to stop claiming the remittance basis.
You have to actively claim the remittance basis by ticking a box on a tax return, but being a non-dom is not a choice – it’s a matter of law. So it’s likely Ms Murty remains a non-dom.2Domicile is often described as “sticky”. According to HMRC, a change of domicile requires a person to make “profound and extensive changes to his or her lifestyle, habits and intention”. So it would take a positive step for Ms Murty to cease to be a non-dom: for example if she decided the UK was now her permanent home and she was going to spend the rest of her life in the UK. That means Ms Murty’s estate wouldn’t be subject to inheritance tax on her Indian shares.
That is a very beneficial result for non-doms and their families but, since the 2017 reforms, it runs out after the non-dom has (broadly speaking) been living in the UK for 15 years. That probably gives Ms Murty around four more years before her estate becomes taxable.3You might think a relatively young couple like the Sunaks wouldn’t be thinking about inheritance tax; but in my experience the very wealthy absolutely do, and from an early age.
The loophole
However, there’s an obscure rule in a 1956 tax treaty between the UK and India4“Obscure” meaning many personal tax specialists aren’t aware of it (unless they have wealthy Indian clients), and I certainly wasn’t previously aware of it. which says this:
That means that someone domiciled in India, like Ms Murty, is never5The consensus view is that this probably overrides the deemed domicile rule, because the deeming is for tax purposes only; it doesn’t change the fact that, as a matter of general law, the person remains domiciled outside the UK. And the definition in the treaty looks to the general law definition, not the tax-specific position. Furthermore, the deemed domiciled rule expressly says that it’s subject to tax treaties. The point is not beyond doubt, but advisers in this area are reasonably confident subject to UK inheritance tax on their non-UK situs property (like Infosys shares), no matter how long they live in the UK.6Provided they do indeed remain a non-dom. If Mrs Murty remained in the UK for say thirty more years then it could be hard for her executors to demonstrate that this was the case – see e.g. the recent Shah case The 15-year rule that applies to everyone else doesn’t apply to Indian domiciled individuals. India is unusual in this respect.7There are similar treaties with a number of countries – but most (like Italy and France) impose their own estate taxes. The “loophole” exists when we have treaties with countries that used to have estate taxes, but now don’t, such as India, Pakistan, and Sweden
Hence Ms Murty’s estate probably won’t pay £300m of inheritance tax when she dies, no matter how long she stays in the UK,8Provided of course she remains domiciled in India and whether the tax is repealed is largely irrelevant to her.9“Largely” because she presumably has some non-Indian property which would be subject to inheritance tax when her 15 years are up, plus some UK property which is already within the scope of inheritance tax. There are other less tangible ways she might prefer abolition to the current position. First, it means she could become UK domiciled with less dramatic tax consequences. Second, because the Indian treaty exemption doesn’t apply to Mr Sunak, and so if Ms Murty dies first, she’d need her children to inherit (probably via a trust of some kind) rather than passing the £750m to Mr Sunak, and therefore (eventually) guaranteeing a big payday for HMRC. Thanks to Dan Davies for making the last two points.10Also note that, if Ms Murty chose, she could set up an “excluded property trust” before her 15 years are up which would in essence preserve much of the benefit of being a non-dom. That would, however, disqualify her from the 1954 treaty. So Indian non-doms face a difficult decision as they approach year 15. Do they solely rely on the treaty, which is straightforward and requires zero structuring and complication, but could be revoked or amended? Or do they put a trust in place, which would require much more care and cost, would survive revocation of the treaty – but of course trust law could change and make such trusts ineffective.
Why this weird result? Because, in the 1950s, India and the UK both had estate duties, and it was perfectly rational for UK-domiciled individuals to pay only UK estate duty, and Indian-domiciled individuals to pay only Indian estate duty. India abolished its estate duty in the 1970s, making the treaty entirely one-sided – but, combined with the UK deemed domiciled rules years, the result is this valuable loophole11Often the word “loophole” is used inappropriately, for example for something (like non-dom status) which reflects an intentional policy stance. However in this case it seems clear the outcome is both unintended and anomalous for UK resident Indian domiciled individuals.
It’s not up to Ms Murty whether to claim the treaty, and she’s not remotely to blame for being a non-dom or having a potential treaty claim. She’s also not the only one who benefits from the treaty – I gather it is commonly used by Indian ex-pats. But the result is inequitable. The handful of treaties that work this way should be amended or repealed12Or overridden for cases where the treaty creates double non-taxation, and the loophole closed.
Picture by Simon Walker / No 10 Downing Street, licensed under Attribution-NonCommercial-NoDerivs (CC BY-NC-ND 2.0)
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1See Infosys’s most recent disclosures, page 3, about 2/3 of the way down
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2Domicile is often described as “sticky”. According to HMRC, a change of domicile requires a person to make “profound and extensive changes to his or her lifestyle, habits and intention”. So it would take a positive step for Ms Murty to cease to be a non-dom: for example if she decided the UK was now her permanent home and she was going to spend the rest of her life in the UK.
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3You might think a relatively young couple like the Sunaks wouldn’t be thinking about inheritance tax; but in my experience the very wealthy absolutely do, and from an early age.
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4“Obscure” meaning many personal tax specialists aren’t aware of it (unless they have wealthy Indian clients), and I certainly wasn’t previously aware of it.
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5The consensus view is that this probably overrides the deemed domicile rule, because the deeming is for tax purposes only; it doesn’t change the fact that, as a matter of general law, the person remains domiciled outside the UK. And the definition in the treaty looks to the general law definition, not the tax-specific position. Furthermore, the deemed domiciled rule expressly says that it’s subject to tax treaties. The point is not beyond doubt, but advisers in this area are reasonably confident
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6Provided they do indeed remain a non-dom. If Mrs Murty remained in the UK for say thirty more years then it could be hard for her executors to demonstrate that this was the case – see e.g. the recent Shah case
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8Provided of course she remains domiciled in India
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9“Largely” because she presumably has some non-Indian property which would be subject to inheritance tax when her 15 years are up, plus some UK property which is already within the scope of inheritance tax. There are other less tangible ways she might prefer abolition to the current position. First, it means she could become UK domiciled with less dramatic tax consequences. Second, because the Indian treaty exemption doesn’t apply to Mr Sunak, and so if Ms Murty dies first, she’d need her children to inherit (probably via a trust of some kind) rather than passing the £750m to Mr Sunak, and therefore (eventually) guaranteeing a big payday for HMRC. Thanks to Dan Davies for making the last two points.
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10Also note that, if Ms Murty chose, she could set up an “excluded property trust” before her 15 years are up which would in essence preserve much of the benefit of being a non-dom. That would, however, disqualify her from the 1954 treaty. So Indian non-doms face a difficult decision as they approach year 15. Do they solely rely on the treaty, which is straightforward and requires zero structuring and complication, but could be revoked or amended? Or do they put a trust in place, which would require much more care and cost, would survive revocation of the treaty – but of course trust law could change and make such trusts ineffective.
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11Often the word “loophole” is used inappropriately, for example for something (like non-dom status) which reflects an intentional policy stance. However in this case it seems clear the outcome is both unintended and anomalous
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12Or overridden for cases where the treaty creates double non-taxation
5 responses to “An obscure loophole means Rishi Sunak’s family probably wouldn’t benefit from the abolition of inheritance tax. They’re already exempt.”
You mention “It’s not up to Ms Murty whether to claim the treaty”. I would be very interested in your thoughts on why so. I practice in tax outside of the UK, so perhaps it is a UK specific thing but I would typically think of treaty relief as being discretionary (that is, discretionary for those that are eligible) with the exception of limited circumstances (for example, some jurisdictions may have domestic rules to invoke treaty residency as an automatic override to limit dissymmetric outcomes such as entities not being taxed as resident due to treaty relief but also not being subject to non-resident withholding taxes due to residency status under domestic rules). Absent a specific rule, I would have thought that one could simply opt not to avail of relief. So similar to your wording above that she has to “actively claim the remittance basis”, I would think she would also have to “actively claim the treaty relief”. And given the relief’s obscurity, all the more need to actively rather than automatically claim. However if your point is not that she can’t take an altruistic stance not to claim, but rather that the exceptions existence is not of her doing, then fully understood.
Some other comments / thoughts in this regard:
a) If she were to still be in the UK at the time of her death (30-40 years into the future realistically), she might well have acquired a ‘domicile of choice’ in the UK based on the overall facts & circumstances of her life etc.;
b) If I recall correctly, there is a suggestion that she has a US Green Card – if this is the case, I believe she would be caught by US inheritance taxes even if she avoids UK IHT (and giving up a Green Card – whilst possible – does actually result in a type of exit tax liability in most cases);
c) Given how old the UK / India DTA actually is, there must be some possibility that it would be updated in the coming years (and I’d be surprised if this clause survived any updating).
Just curious. Why would setting up an excluded property trust mean that the Treaty would no longer apply to her (footnote 10)? She’d not have changed her domicile status? Are there provisions in there which would deny her the treaty benefits? Otherwise it sounds like a good “belt and braces” method of protecting her non uk situs assets up to the date of settling the trust.
Not my area, but I believe the answer is that the tax would be tax of the trust, not her tax. The trust can’t claim the treaty.
I am not sure that something that is written in black and white in legislation and in very clear language can either be described as a loophole or obscure. This is crystal clear and very settled law by this point. There may be good reasons to think it’s a bad law, but that’s not the same thing.