Colonial-Era Tax Loophole Benefits Wealthy Indian Families in the UK

In a surprising revelation, wealthy Indian families residing in the United Kingdom are poised to inherit substantial fortunes without incurring inheritance tax, courtesy of a colonial-era “loophole” that has persisted over the years.

The Colonial-Era Treaty

This intriguing historical twist can be traced back to a post-colonial agreement formed after India gained independence in 1947. The pact’s primary objective was to prevent British and Indian citizens residing in each other’s countries from being subjected to double taxation in the form of death duties.

A Legal Quirk in the Modern Era

Remarkably, this treaty remains in force even after India abolished inheritance tax more than three decades ago. Legal experts suggest that this seemingly antiquated technicality could potentially translate into substantial tax savings, possibly reaching hundreds of millions of pounds, for families like that of Rishi Sunak.

Pressure on the Prime Minister

The news comes at a time when the Prime Minister is facing mounting pressure to eliminate inheritance tax in the UK. The Telegraph and over 50 Conservative Members of Parliament (MPs) have called for the abolition of this tax.

Sunak’s Potential Windfall

Rumours are circulating that Chancellor of the Exchequer Rishi Sunak is contemplating a reduction in the inheritance tax rate in the upcoming March Budget. There is even talk of a complete elimination of the tax, which could find its way into the party manifesto for the next General Election.

Impact on Middle-Class Families

Inheritance tax in Britain has increasingly affected ordinary middle-class families, owing to a combination of stagnant tax allowances and a decade-long surge in property prices. Recently, Conservative MPs proposed raising the threshold to £1 million as a potential strategy to win voter support in future elections.

A Case in Point: Akshata Murty

Notably, Akshata Murty, Mr Sunak’s wife, is the daughter of N.R. Narayana Murty, the billionaire founder of Indian IT giant Infosys. Forbes estimates Mr. Murty’s net worth at $4.1 billion (£3.3 billion). Akshata Murty owns a 0.93% share of Infosys, valued at approximately £600 million.

Potential Tax Savings

However, due to this colonial-era treaty, her estate may escape the inheritance tax on assets held in India. This could potentially result in savings of £240 million solely on the Infosys shares.

Christopher Thorpe, representing the Chartered Institute of Taxation, explained that while the treaty isn’t exclusive to the super-rich, the Sunak family could benefit substantially from this historical quirk.

Current Inheritance Tax Regime

In the UK, inheritance tax is currently levied at a rate of 40% on wealth exceeding the £325,000 threshold. An additional allowance of £175,000 applies to the main residence when bequeathed to direct descendants. Notably, this threshold has remained unchanged since 2009, and Chancellor Jeremy Hunt has extended the freeze until 2028.

Rising Tax Collection

In light of these measures, the UK government collected £7.1 billion in inheritance tax revenue last year. Projections indicate that this figure could surge to £8.4 billion by 2028, according to official estimates.

Domicile Matters

Furthermore, experts suggest that Akshata Murty may also avoid inheritance tax on any bequest from her billionaire father, provided he is domiciled in India. In the UK, inheritance tax is imposed on the deceased’s estate rather than the recipient.

In a tax landscape filled with complexities, this colonial-era treaty has resurfaced as an unexpected factor, potentially reshaping the financial future of wealthy Indian families residing in the UK.

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