Estate Duty - a Trigger for Succession Planning!

Ketan Dalal16 October 2019

BCAS Lecture Meeting

Estate Duty in India

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• Governing Law - Estate Duty Act, 1953 • Objectives:

➢ Revenue considerations➢ Addressing wealth disparity

• Form of ‘tax’ on total value of properties held by an individual upon his/ her demise

• Exemption for one residential house• A few anti-abuse provisions:

➢ Gifts in contemplation of death➢ Charitable Gifts (within 6 months)➢ Other Gifts (within 2 years)

• Maximum Rate - as high as 85%

Earlier Estate Duty Law

Scrapping Saga

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• Complex legislation (different rules for valuation of different assets)• Multiple litigation (ownership of properties, valuation of properties,

etc)• Double Tax (Wealth tax was also levied)• Administration cost vis-à-vis revenue

Estate Duty (Abolished in 1985)

• Restrictive definition; from 1993 financial assets excluded (previously, all assets included)

• High administration and compliance cost

Wealth Tax (Abolished in 2015)

Estate Duty – What could be expected ?

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• Rate ? (global precedents)• Exempt limit could be 3-5 Crs ?• All assets likely to be covered (except one residential

house)• Valuation issues ? (Rule 11UA type provisions likely )

Where do

trusts fit in ?

Country Rate of Tax (%)(Progressive Tax)

Japan 10 – 55

South Korea 10 – 50

Belgium 3 – 80

Denmark 0 – 53

UK 0 – 40

USA Up to 40

Succession Planning – An Overview

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Succession Planning

Structure amenability

Potential family issues / settlement

Estate duty issues

Estate Duty could be a trigger, but integrated approach needed!

Structures related

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Typical structure issues

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Shareholders related

• Shareholding pattern vis-à-vis operating contribution

• If shareholding distributed amongst family members, could have major issues

Operating entity related

• Unrelated businesses in one company; major issue vis-à-vis divestment or JV

or IPO

• Similar business in different entities

• Surplus or “personal” assets in company; if strategic initiative, this becomes a

major issue for valuation

• Common services for group companies without any formal structure

The approach

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Acknowledge the problem

Decide the objectives

Consensus of Family

Monitoring mechanism

What could a potential restructuring involve?

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• Identification of roles, responsibilities and KRAs• Organisation chart and reporting• Remuneration and perks for family members• New inductions from family ?

Operating structure

• Movement of business to other entities• Merger/ Demergers• Capital Reduction/ Buy-Back• Transfer of shares etc

Shareholding/Entity structure

Addressing operating structure could lead to changes in shareholding and entity structure… and succession planning!

Succession Planning: Hope for the best, plan for the worst!

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Succession Planning: The Big Picture

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Continuity Planning

Harmony vis-à-vis Conflict Management

Succession Planning

Succession Planning: The Big Picture

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Death

Dispute

Divorce

Disability

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Delve into the Unique Factual Matrix

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Ownership Business

Family

1 2

4 6

5

7

3

Size of the Family and Family Dynamics

Wealth Complexity: Business and Personal

1. Inactive or passive owners

2. Management and employees

3. Owner managers

4. Inactive or passive owners/ family members

5. Family

6. Family employees

7. Working family owners

Key

Involvement of family members and other professionals in business

A Bouquet of Complex Wealth Mix

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Identification of Wealth Mix: A bare necessity

Immovable

properties, Insurance

policies, jewellery,

Paintings, sculptures,

lockers, receivables

Shares in HoldCos/

Operating Companies

Domestic/

international

investments: Shares,

Mutual Funds, AIFs,

leases

Are personal assets

ringfenced from

business liabilities?

Liabilites including

hidden liabilities/

Personal guarantees

given

Identification of

business assets used

for family needs

Personal

Business

Writing on the wall… should you plan ?

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➢ Succession planning is critical but very few want to address this issue !

➢ Estate duty is the unfortunate trigger !

➢ Succession planning has multiple dimensions and needs complete customisation – various hues and colours

• Family structure and dynamics

• Age and health

• Nature of assets (operating businesses add to complexity significantly)

• Trust on children

• Gift versus Trust

• What kind of Trust and which assets?

• Who will be the Trustee(s)?

Tools to Succession Planning

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Family Charter/ Constitution/ Shareholders’ Agreement: From governance perspective

Wills: From succession of assets perspective

Trusts: Encapsulates Will + Family Charter/ Constitution

Evolution from Family Charter/ Constitution to Trusts dependent upon the inherent factual complexity

Trusts: A Framework

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Beneficiaries(Directly/ Through Sub-Trusts)

Trust

Shares/ Interests in

entities

Physical Assets

TrusteesSettlor/

Contributories

Fiduciary Capacity to manage the Trust Assets for the benefit of Beneficiaries

Settles/ Contributes the Trust Property

The Big Question: Who would be the Trustees?

May have more than one trust for different

Assets

Trust as a Holding Vehicle

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Benefits

Trust document to

define governance framework

Income and wealth

distribution framework

No direct ownership/ Control with

family members

Matters like exit & non-

compete

Tax efficiency in

distribution of income and assets

Solution to Inheritance

tax?

What could a succession planning exercise involve ?

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TrustFamily

Settlement

Restructuring of business

Depending upon objectives, assets and whether business or otherwise

Could either be any one or a combination of any two or all three facets

Key Issues : trusts, family settlements and restructuring

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Certain Issues - Trust

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• Determination of trustee/ settlor/ beneficiary• Inclusion/ Exclusion of Properties• Nature of trust – discretionary/ specific• Decision making

Commercial

• 56(2)(x) – only for the benefit of ‘relatives’• Taxation of trusts – section 161/ 164• Revocable trust - tax issues

Tax

• Share of listed company : exemption under Regulation 11 – SEBI Circular (22 Dec 2017)

• Other conditions/ undertakings – only individual / relative trustee?

Regulatory (SEBI Takeover Code)

Certain Issues – Family Settlement & Restructuring

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• Parties to Family Settlement• Properties / assets / businesses involved in Family Settlement• Valuation• Other considerations - Split of costs, dispute resolution, etc

Commercial

• Capital gains – whether a ‘transfer’ u/s 2(47)?• Applicability of 56(2)(x) ? • Company as a party to family settlement ?• Restructuring & GAAR provisions ?

Tax

• Registration of Family Settlement agreement ?• FEMA implications (if a non-resident family member is involved)• SEBI Takeover Code (eg Joint to sole control)• Stamp Duty on Deed/ Agreement / Conveyance (immovable

Property)?

Regulatory

Key Takeaways

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Key Takeaways

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Need to identify the issues

Need to identify objectives

Investing time in addressing the issues and achieving the objectives

Take steps to ringfence business from family issues

Work towards the objective with realistic time frames, costs and uncertainties

Thank You

Ketan Dalal

ketan.dalal@katalystadvisors.in

+91-9820039516