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The legal nitty-gritty
The Times of India, June 9, 2016
Irrevocable trusts offer max benefit for HNIs
Trusts help high net-worth individuals (HNIs) to ensure efficient succession planning and may also result in mitigating tax liability -as dividend income in hands of individuals who are resident in India in excess of Rs 10 lakh is now taxable. However, even non-residents have set up trusts or are looking at doing so. “Persons of Indian origin who are taxpayers in another country also favour trust structures to house their India assets. By doing so, it is possible to defer the income arising to them till the time the trust distributes funds. Thus, it reduces the tax incidence in their current country of residence,“ says Anil Harish, partner, DM Harish & Co, a law firm.
But setting up a trust is not as simple as it looks, as various legal ramifications need to be considered.
Trusts are a complex structure and getting things right is important. To begin with, an HNI needs to set up a private trust which can hold shares.There is much more that needs to be looked at, from a legal perspective. (See graphic for glossary of legal terms).
“If a trust is to be set up by an HNI, it would have to be irrevocable. If it is revocable, then the income would still be taxed in the hands of the settlor (the HNI setting up the trust), so it would not help,“ explains Harish.
Irrevocable trusts offer other advantages. “There is no capital gains tax on settlement of shares in an irrevocable trust (in simple terms transferring shares to the trust). Further, if shares are transferred via a demat mechanism there may be no stamp-duty liability ,“ adds Pranav Sayta, family business services leader at EY-India.
In other cases, the statespecific stamp duty , which is leviable on settlement of a trust, would vary depending on whether the assets are movable or immovable. In Maharashtra, it attracts a rate of 3% and 5%, respectively .
Tax on distribution of trust funds
“Under India's current tax laws, there is no tax incidence in the hands of beneficiaries (who typically comprise of the HNI and his family members) when funds are distributed by a trust,“ expla ins Sayta. In case of a determinate trust, the income is taxed in the hands of the trust in like manner as it would in the case of the beneficiaries. On the other hand, in case of a discretionary trust, the income is distinct and is taxed at the maximum marginal rate of 30% plus applicable surcharge and cess.
Thus, it is possible to argue that dividend income earned by a discretionary trust would be exempt in its hands. On distribution by the trust, funds would also be exempt in the hands of the beneficiaries.
“However, a view that dividend income in excess of Rs 10 lakh in the hands of a discretionary trust is exempt has not yet been tested in courts. Caution is advised as such a view could result in litigation,“ says Sayta.
A holistic view is to be taken when contemplating tax structures, looking at the specific needs of each HNI, sum up experts.
2016: HNI interest grows because of dividend tax
The Times of India, June 9, 2016
Lubna Kably High net worth individuals (HNIs) are showing a keener interest in setting up private family trusts.While interest in trust structures has been growing over the past few years, recent months have seen a spike in inquiries by 25 to 50%, say consultants. The trigger is that post the recent Budget, resident Indian shareholders earning an aggregate dividend income of Rs 10 lakh or more in a year have to pay a flat rate of 10% on such income. By setting up trusts, there is a possibility of reducing this tax outgo or doing away with this tax liability .
This flat tax, as the explanatory memorandum to the Finance Bill clarifies, is payable by residents in India who are `individuals', `hindu undivided families' or `firms.Thus, it may be possible to argue that dividend income earned by a discretionary trust, even if in excess of Rs 10 lakh, would be exempt from tax in the hands of the trust. However, if this view is adopted, litigation may arise in the future.The icing on the cake is that fund distribution by a trust is not taxable in India, in the hands of beneficiaries (who typically comprise an HNI and his family members).
Another option available to an HNI is to divide his share portfolio between his individual and trust holdings.“HNIs have a shown a renewed interest in forming trusts structures to separate the shares that they intend to hold long term for the benefit of their family . Such shares are housed in a private family trust, whereas the HNI retains in his individual capacity shares in which he intends to trade. The dividend income received is thus separated between the individual HNI and the private family trust. Distributing the dividend income, in such a manner, can result in lowering or eliminating the probability of imposition of the new tax,“ explains Neha Pathak, head of trust & estate planning, Motilal Oswal Private Wealth Management.
To illustrate, if an HNI has a dividend income of say Rs 15 lakh, he could divide his investments between a trust and individual holding in a manner that the dividend is split and reduced to below the Rs 10 lakh threshold in his hands. The maths and tax risks (if such structuring is viewed by tax officials as a tax evasion device) would vary from case to case.
“HNIs who are showing an interest in trust structures are an even mix of promoters of family owned businesses and highly paid professionals, with an increasing rise in inquiries from the latter.But, at an overall level, around 60% of the HNIs exploring trusts are businessmen,“ says Gautami Gavankar, principal advisor, estate planning, Kotak Mahindra Trusteeship Services.
Benefits Of A Trust
While inquiries for setting up trusts have spiked recently, interest in tax structures has been growing steadily over the past few years as the benefits are multi-fold.
Both Pathak and Gavankar believe the core interest stems from an efficient succession planning which trusts enable. It provides an upfront solution to any possible future disputes within the family , including any challenges to a will at a later date. “Further, trusts also offer ring-fencing of assets from future liabilities or possible re-introduction of estate duty in India,“ adds Gavankar.