Fear of inheritance tax looms large, India’s super rich are looking to set up trusts

Inheritance tax was abolished in 1985. But fearing its return, rich professionals and businessmen are flocking to tax consultants to set up trusts to avoid the tax.

Representational image | electrosawhq.com

New Delhi: Wealth managers and tax consultants have been particularly busy in the run-up to the Modi government’s 5 July budget. Reason: Rich professionals and businessmen are flocking their offices following a buzz that the government could re-introduce the dreaded inheritance tax.

The legal solution to get around this tax: Set up family wealth trusts.

Inheritance tax is the tax levied on assets, including properties that are transferred to the legal heirs. The heirs have to pay the tax at the time of inheriting the assets. With tax collections falling on the back of a slowing economy, the market is abuzz that the government may re-introduce the tax to shore up revenues and rein in its fiscal deficit.

Inheritance tax or estate duty is levied in many developed countries, including the United States, with rates as high as 50-55 per cent.

India also had an inheritance tax levied as per different tax slabs. The highest tax rate was as high as 85 per cent before it was abolished in 1985 due to low tax collections, but high administrative and procedural costs. Subsequently, the wealth tax was introduced that was also abolished in 2015.

In the previous Narendra Modi government, the finance ministry had introduced a surcharge on income tax for those having a taxable income of over Rs 50 lakh a year.

‘Number of enquiries about setting up trusts has increased’

Typically, a trust is set up and all the property of an individual is transferred to the trust that can either be irrevocable or revocable. The trusts have trustees to administer them and a list of beneficiaries is also drawn up.

Irrevocable trusts are used to avoid inheritance tax. In an irrevocable trust, properties once transferred to the trust cannot be transferred back, said Surabhi Marwah, national leader, EY India, a private client service.

Trusts have been increasingly used by many rich corporate businessmen to allocate their family wealth effectively to the beneficiaries.

Marwah said more people were enquiring about setting up trusts to plan in a legal manner to avoid the inheritance tax.

“This government has been talking (about) some sort of tax on the super rich, which has led to speculation about the possibility of a re-introduction of estate duty. It may come in this year’s Budget or later,” she said, adding that a government’s administrative machinery would have to be prepared to handle the implementation of the estate duty, and the exemptions and inclusions should be well thought out.

“While the number of enquiries about setting up trusts has increased, many are waiting for an announcement to finalise the trust structure,” she added.

‘Inheritance tax has to justify cost of collecting such tax’

Salil Bhandari, founder and managing partner of BGJC Associates, a consultancy firm, said there was an increase in activity around setting up trusts before the Budget. He also pointed out how, in the last two years, many rich businessmen and professionals had turned to the trust structure after speculation about a possible levy of inheritance tax.

“Inheritance tax was present in India in some form or other earlier also. But, the costs balanced out the advantages. The cost of collection of the tax, the cost of people losing out on potential capital due to the levy may outweigh possible inflows from tax collection,” he said.

Rakesh Nangia, managing partner, Nangia Advisors (Andersen Global), said inheritance tax, if re-introduced, had to justify the administrative cost of collecting such tax, which was the core reason for abolishing it in 1985.

He added though trusts had inherently been used as a device for succession planning, it was not the only purpose of forming a trust.

“A trust structure serves various other purposes — limiting the liability, better privacy than a company, structuring the wealth distribution among the beneficiaries in a more flexible manner, etc,” he said.