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Taxation in multiple jurisdictions – the importance of understanding Double Taxation Treaties

3 min read

Where an individual has assets in multiple jurisdictions, it is vital to consider the impact of taxation in one jurisdiction in the context of another. An overall approach to worldwide wealth must be considered, especially where there is a tax liability incurred in a jurisdiction in which the individual is not domiciled for tax purposes.

Income, business profits, disposal of assets that have accrued in value and death are common events that may lead to a tax liability, but inevitably different jurisdictions have different laws, thresholds and rates of tax. Double Taxation Treaties can be crucial here – in such agreements two different jurisdictions can outline in which jurisdiction a particular event will lead to a tax liability, such that an individual or entity is not liable for the full amount of tax concerning a single event in more than one jurisdiction, so called “double taxation”. It is important to consider double taxation treaties carefully, as they often only apply to specific taxes.

To illustrate this clearly, I will use two separate examples: UK inheritance tax payable by the estate of an individual domiciled in South Africa and UK capital gains tax payable on the disposal of land in the Isle of Man by an individual domiciled in the UK.

Under The Double Taxation Relief (Taxes on Estates of Deceased Persons and on Gifts) (Republic of South Africa) Order 1979, where an estate holds assets in both the UK and South Africa, broadly the estate should only be liable to pay UK inheritance tax when the deceased is domiciled in the UK. There are certain exceptions to this, for example under Article 9, the UK can decide that shares, debentures and unit trust holdings in the estate of a South African domiciled individual be taxed by the UK, rather than South Africa. However, the double tax treaty here acts to limit the amount of inheritance tax, if any, payable on the death of a South African domiciled individual with assets in the UK.

Regarding UK capital gains tax, the default position is that a person is liable to pay capital gains tax in respect of chargeable gains accruing to them in a tax year if they are resident in the UK during any part of the tax year. Assets here include all forms of property wherever they are situated, so a charge would apply to gains on assets situated both in the UK and overseas. In the case of the Isle of Man, there is no capital gains tax or similar tax levied on the disposal of assets. Under Article 13 of the UK – Isle of Man Double Taxation Agreement and Protocol entered into force on 19 December 2018, there is provision for gains derived by a resident of one Territory from the sale of land and property in the other Territory to be taxed in the latter Territory, rather than the one in which the person in question is resident. However, such double tax relief is only available where the same gain is liable to be taxed in both the UK and another jurisdiction. Since there is no tax due in the Isle of Man on the disposal of the land and property, there is no tax paid in the Isle of Man which can be credited against the UK capital gains tax liability, and therefore such a disposal of land in the Isle of Man by a UK domiciled individual would likely lead to a a capital gains tax liability in the UK.

Where multiple jurisdictions are concerned, it is always advisable to consult an experienced tax professional to ensure that any liabilities are calculated correctly and that tax is not overpaid or underpaid on account of incorrectly assessing domicile and the impact of any double taxation treaty.

  • By Celia Gould – Trainee Solicitor