A Guide to UK-India Cross-Border Taxation

In an increasingly globalized environment, individuals are establishing themselves internationally for job possibilities or business growth. There is a noticeable trend in this movement of people from India to the United Kingdom as a growing Indian population is moving to the UK for better employment opportunities, pursuing further education, or setting up a new enterprise. This shift has two bilateral effects. On the positive aspect, the movement of the Indian population to the UK paves the way for professional and personal advancement. On the contrary, the management of financial interests across two distinct tax countries becomes challenging.

Many Indians residing in the UK own real estate, mutual funds, or inherit family assets in their country. When these assets are sold for a profit, there are tax ramifications in the UK and India. A thorough awareness of the tax laws in both nations, including the requirement for tax declarations and adherence to local legislation, is necessary to navigate these tax responsibilities successfully. This blog is a detailed guide for UK readers to increase their horizon on better management of Indian investments while ensuring tax minimization.

Understanding Tax Residency

• Tax Residency in India: An individual's tax liability in India is based on their tax residence. For taxation reasons, an individual is deemed a resident if they satisfy any of the subsequent criteria:
  

1. Remain in India for a minimum of 182 days within a fiscal year, or a minimum of 60 days during the fiscal year and 365 days or more in the four fiscal years prior.

2. Only income arising or presumed to arise in India, or income received or believed to arise in India, is subject to taxation for non-residents

• Tax Residency in the UK: The Statutory Residence Test (SRT) used in the UK is done to establish a person's tax residence based on the following parameters:

1. The duration of time spent in the UK throughout the tax year

2. The individual's connections to the UK, including their employment, family, place of residence, and the 90-day tie.
   

It is essential to recognize one's tax residence status since it determines the extent of one's tax liabilities in both countries.

 

Tax Implications in India

Mutual Funds:

• Equity-oriented funds: Without the advantage of indexation, long-term capital gains (LTCG) on equity funds are subject to a 10% tax on profits exceeding ₹1 lakh annually. The tax rate on short-term capital gains (STCG) is 15%.

• Debt Funds: There is a 20% tax rate on long-term capital gains (LTCG) with indexation advantages. The STCG from this income is included in the person's income and subject to income tax slab calculations.

Real Estate:

• Capital gains can be categorised as short-term or long-term based on their holding time resulting from the sale of real estate. While STCG is taxed in accordance with each person's income tax slab rates, LTCG on property is subject to an indexation rate of 20%.
  

• There are a number of exemptions available under sections 54, 54F, and 54EC to lower the amount of tax due on the sale of real estate.

Understanding UK Tax Implications for Investments in India

For UK residents investing in Indian mutual funds and real estate, navigating the tax landscape requires a nuanced understanding of UK tax regulations, specifically concerning the tax-free allowance and the distinction between Reporting and Non-Reporting Funds. These elements play pivotal roles in strategic tax planning and investment decision-making.

Tax-Free Allowance in the UK

• One of the first considerations for UK investors with overseas investments, including those in India, is the Annual Exempt Amount for capital gains.

• For the tax year 2023/2024, this allowance enables individuals to realize capital gains of up to £12,300 without incurring any tax.
  

• This provision is particularly beneficial for investors as it allows for a portion of gains from the disposal of assets, such as shares in mutual funds or property, to be exempt from taxation.
  

• Effectively managing investments to maximize the use of this allowance can significantly reduce an investor's overall tax liability.

Reporting vs. Non-Reporting Funds

The tax treatment of gains from mutual funds in the UK hinges on whether the fund is classified as a Reporting or a Non-Reporting Fund. This classification has a substantial impact on how gains are taxed and requires careful consideration by investors.

Reporting Funds:

• These are offshore funds that comply with HMRC requirements to report all necessary tax information to both the HMRC and investors.

• Gains from these funds are treated as capital gains, subject to Capital Gains Tax rates.

• This classification allows investors to utilize their tax-free allowance, potentially lowering their tax burden on investments in Indian mutual funds.

Non-Reporting Funds:

• Unlike Reporting Funds, gains from Non-Reporting Funds are taxed as income, according to the investor's Income Tax bands, which are often higher than Capital Gains Tax rates.

• This approach does not permit the use of the tax-free capital gains allowance, leading to a potentially higher tax liability for the investor.

• The absence of reporting compliance means these funds might not align as well with tax-efficient investment strategies for UK residents.

For investments in Indian mutual funds and real estate, investors must:

•  Assess the fund's reporting status before investing, considering the long-term tax implications.

• Plan disposals and gains to maximize the use of the UK's tax-free allowance.

• Maintain accurate records and report international investments on their Self-Assessment tax return, ensuring compliance with UK tax laws.

 

Tax Disclosures and Compliance :

• In India: Residents of the United Kingdom who have earned income or interests in India must record this on their Indian tax filings, including information on overseas assets in Schedule FA.

• In the UK: Gains and income earned from overseas must be disclosed to HMRC, normally by filing a self-assessment tax return. To avoid fines, more care should be taken while declaring assets located abroad.

 

Case Studies :

1. Case Study 1: Selling real estate in India results in LTCG for a UK individual. Subject to UK tax regulations, the individual can seek relief under the India-UK DTAA and deduct tax paid in India from their UK tax obligation.

2. Case Study 2: In India, a person can invest in mutual funds and get both capital gains and dividends. To reduce double taxation, the tax on their profits that was paid in India might be deducted from their UK tax responsibilities.

 

Case Study 1: Selling Property in India

Scenario Recap: Raj intends to return the money to the UK after making a sizable profit on the sale of a house in Pune, India.

Tax Implications in India Recap:

• Taxable Gain: ₹45,00,000

• Tax Paid in India: ₹9,00,000

UK Tax Calculations:

• Assuming that after conversion and taking into account any permissible expenses and reliefs, Raj's total taxable gain in the UK is £45,000.

• UK Capital Gains Tax rate (assuming a higher rate taxpayer): 20%

• UK Tax Liability: £45,000 * 20% = £9,000

• Credit for Tax Paid in India: £9,000 (equivalent)

• Net UK Tax Due: £9,000 - £9,000 (credited) = £0

Raj uses the Foreign Tax Credit relief to fully offset the tax he owes the UK because he has already paid the tax in India.

 

Case Study 2: Earning from Mutual Funds in India

Scenario Recap: Anita's investment in Indian equities mutual funds yields a profit.

Tax Implications in India Recap:

• Taxable Gain: ₹3,00,000

• Tax Paid in India: ₹30,000

UK Tax Calculations:

• Converted Gain: Assuming £3,000 (for simplicity and illustration purposes).

• UK Capital Gains Tax rate (assuming basic rate taxpayer): 10%

• UK Tax Liability: £3,000 * 10% = £300

• Credit for Tax Paid in India: £300 (equivalent, assuming current exchange rates for illustration)

• Net UK Tax Due: £300 - £300 (credited) = £0

Anita can use the tax she paid in India to offset her UK tax due, demonstrating the value of comprehending and utilising the rules of the Double Taxation Agreement.

Conclusion:

The complexities of UK tax law, especially regarding international investments, underscore the importance of informed decision-making and strategic planning. By understanding the nuances of the tax-free allowance and the impact of a fund's reporting status on tax liabilities, UK residents can make more informed investment choices in Indian markets. Consulting with tax professionals can provide tailored advice, ensuring that investments are not only tax-efficient but also aligned with broader financial goals. This holistic approach to investment and tax planning enables UK residents to navigate the cross-border tax landscape confidently, optimizing their global investment portfolio for tax efficiency and compliance.

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