Succession planning is an important facet in everybody’s life. The happenings within the final one 12 months have additional enforced upon us the criticality of the identical. There are varied methods and means by means of which intergenerational switch of wealth might be ensured. For movable properties, akin to shares of group firms, financial institution balances, mounted deposit and different monetary property, the subsequent era might merely be appointed as nominees to make sure that these property get transmitted to them on demise of the present homeowners. Further, different movable property, akin to jewelry, artifacts, and different valuables are normally gifted through the lifetime of the person. However, relatively than offering for a piecemeal wealth transition plan, individuals typically do a Will or, of late, have began settling Family Trusts to make sure seamless switch of financial curiosity to the subsequent era.
A Family Trust could also be thought of to be a simpler mechanism for guaranteeing unfettered and seamless succession planning. This is as a result of the Trust is carried out through the lifetime of the patriarch, and subsequently, he can make sure that the identical is functioning within the method he would really like it to function and, if required, make amendments to make it simpler and environment friendly. Further, in case of a Family Trust, the privateness of the doc is maintained as the identical will not be required to be executed by means of a court docket course of, as it might be in case of a Will.
Seeing the rising development round creation of Family Trusts for wealth succession, it’s crucial that extra readability is led to sure provisions of the tax legal guidelines in India in relation to Family Trusts.
Creation of a Family Trust construction
At the time of formulation of the Family Trust construction, varied promoter teams decide for a twin Trust construction, consisting of Master Trust and Sub-Trusts, with the intention to present a mechanism for efficient succession planning for not simply their era, however for the long run generations as nicely.
Section 56(2)(x) of the Act requires receipt of property by any assessee on the truthful worth of such property. Therefore, migration of household wealth (akin to company shareholdings, household property akin to jewelry, and so on.) to a Trust construction would have required switch of the identical at truthful worth, with the intention to adjust to Section 56(2)(x). However, an exemption has been offered within the mentioned Section, whereby switch of property from a person to a Trust, which has been created solely for the profit of relations of the person, is exempt from applicability of Section 56(2)(x). Further, the time period ‘relative’ has been outlined to incorporate solely people.
Therefore, on the idea of a literal studying the availability, exemption could be out there solely in case of a single Trust construction, i.e. whereby particular person members of the family are direct beneficiaries within the Trust. However, in case a twin Trust mannequin is created, i.e. a Sub-Trust is a beneficiary of the Master Trust, availability of the exemption is ambiguous.
Accordingly, a readability needs to be offered in Section 56(2)(x) that if a Sub-Trust is a beneficiary of the Master Trust and the beneficiaries of the Sub-Trust are people who’re relations of the donor of the Master Trust, then the exemption from 56(2)(x) needs to be out there. Since the final word beneficiaries of the Master Trust would ultimately be particular person relations of the donor, the identical could be according to the spirit of the above-mentioned exemption. Such readability would facilitate creation of extra environment friendly Trust buildings for the promoter teams.
Taxability of capital good points of a Discretionary Family Trust
A Discretionary Trust is a Trust whereby the helpful curiosity ration of the beneficiaries will not be outlined on the time of creation of the Trust. The Trustees have the discretion to determine the timing and quantum of distribution of property and earnings of the Trust amongst the beneficiaries. As per Section 164 of the Act, all earnings of a discretionary Trust is taxable at Maximum Marginal Rate, i.e. the tax rate (together with surcharge) relevant in relation to the very best slab of earnings within the case of a person. The tax rate prescribed for the very best slab of earnings for people is 30%, plus relevant surcharge and training cess.
The rate of tax leviable on capital good points has been specified underneath Section 112, 112A and 111A of the Act, and ranges from 10%-20%. Therefore, in case of a discretionary Family Trust, capital good points must also be chargeable on the rate of 10-20% with the intention to make sure that it’s at par on the rate relevant to the underlying particular person beneficiaries.
Any different interpretation could be illogical, as a result of in that case, if capital achieve accrues to the people instantly, then they’d be taxable at a decrease rate as in comparison with the efficient rate relevant to them by means of the Family Trust.
Availability of deductions to Family Trusts
A Family Trust with people as beneficiaries needs to be taxed as a person. This precept has additionally been upheld by varied courts up to now, whereby taxability of a Trust has been analyzed. There are sure deductions underneath the Act which can be found to people and HUFs, e.g. deduction underneath Section 54F, varied deductions prescribed underneath Chapter VIA (Section 80C, 80CCA, and so on.). Benefits of such deductions must also be prolonged to Private Family Trusts to make sure that the taxability of the Family Trust is totally at par with that of its particular person beneficiaries.
Taxability of dividend acquired by a Family Trust
Pursuant to abolition of Dividend Distribution Tax (‘DDT’) in Finance Act, 2020, dividend is taxed within the arms of the shareholders on the earnings tax rate relevant to them. In case of Family Trusts or High Net Worth Individuals (‘HNIs’), the relevant rate of tax on dividend earnings could also be as excessive as 35.88% (together with most relevant surcharge of 15% and cess of 4%).
Prior to the aforementioned modification, dividend earnings was taxable within the arms of the recipient @ 10% (underneath Section 115BBDA). Therefore, modification has elevated the tax legal responsibility of the recipient on receipt of dividend earnings.
Dividend is said by an organization out of its post-tax income. Therefore, levy of additional tax on dividend acquired by the shareholders results in double taxation of the identical earnings.
Abolition of tax on dividend earnings would deliver company buildings according to revenue distribution by partnership corporations or LLPs, whereby revenue share acquired by the companions usually are not taxable.
With the elevated impetus for creation of Private Family Trusts for holding company and private property, the above talked about clarifications from an Income Tax perspective are crucial and could be a welcome transfer by the legislature.
One of the first advantages of a Family Trust is that it’s a very clear mechanism of inheritance planning and subsequently, helps keep away from household disputes, which in flip guarantee enterprise continuity and model safety. It wouldn’t be fallacious to say that Family Trust is the brand new age possession automobile for household wealth and for housing the household workplace. Therefore, it’s crucial to have absolute readability across the tax provisions relevant to a Family Trust to make sure enterprise and financial prosperity within the nation.
(By Suvira Agarwal, Associate Partner, Grant Thornton Bharat, with inputs from CA Aashna Malhotra)