In this series on Estate Planning, we have discussed a range of aspects relevant for individuals and businesses, from a domestic as well as international perspective. In the final piece of this series, we cover an aspect which could become a gamechanger in estate planning in India - the possible reintroduction of estate duty. Jayant Sinha talked about it in 2014, and every pre Budget chatter since then has included a conversation on the merits and disadvantages of reintroducing estate duty. A Government that is increasingly displaying socialistic tendencies may well be tempted to bring this "rich tax" back. We examine the contours of the erstwhile estate duty in India and the current state of play of estate and inheritance taxes in key global jurisdictions. Track this development closely - it can materially alter estate planning as we know it in India.

Estate duty

The challenge for anyone creating an estate plan is understanding the impact of taxes on the inter-generational transfer of assets. There are two kinds of taxes which have similar impacts - estate duty and inheritance tax. What is the difference? Estate duty is a tax on assets left behind by a person upon his death, while inheritance tax is a tax on assets inherited by a person.

Estate duty was abolished in India but there has often been chatter with new governments on whether it should be re-imposed. The Estate Duty Act 1953, which was abolished in 1985, was a complex piece of law with different valuation rules for different assets and resulted in many litigation cases. The estate tax was payable by the executors of the estate of a deceased and inheritance exceeding Rs 20 lakh were taxed at 85%.

In 2014, Minister of State for Finance Jayant Sinha created ripples as he aired his views that he was in favour of some form of inheritance tax. However, the central government did not choose to include a proposal in its budget that year. Those who are in favour of estate duty argue that the primary purpose of such a law is not to generate revenues for the government but to remove some of the advantages held by dynastic business owners by ensuring that inheritors do not have an unfair advantage from access to unearned wealth. Re-introducing estate duty could help to level some of the playing field in business, clean up the political landscape and help with philanthropy. Estate duty is seen as a corrective measure by some to help clean up the issues that result with the attitude of the rich that their wealth will continue in perpetuity.

Critics argued that with an entrenched benami system of holding properties, imposing an inheritance tax may not have any impact on the advantages held by dynastic business families. It may also discourage high net worth individuals from investing in India. With the recent demonetization of Rs. 500 and Rs. 1000 notes, one of the stated purposes was to remove the black money and the benami system. Will a new inheritance tax law be far behind?

While India does not have an estate duty, there are still other levies that have to be paid which occur with transfer of inter-generational assets. The title transfer of land property to change the name of the original owner entails stamp duty and registration charges. Taxes on capital gains, the income earned from assets, need to be paid. So for any estate plan, taxation aspects must still be considered to ensure the value of assets are not eroded as it is transferred to beneficiaries.

Outside India

For families that have heirs who reside abroad and those who invest offshore do have to think about the implication of inheritance tax outside India. How do other countries deal with estate duty and inheritance tax? Many countries have some form of estate duty or inheritance tax while some have abolished it.

United States ~ Citizens and legal residents pay taxes to both the federal government as well as the state government. Both federal and state governments impose an inheritance tax and the net amount varies depending on the state of domicile. As a result, United States has some of the highest estate taxes in the world. There is also a gift tax to prevent residents from avoiding paying estate tax by giving away the assets during their lifetime.

The high estate taxes have resulted in encouraging many high net worth individuals such as corporate founders to set up large scale philanthropy efforts to avoid the effects of the tax eating into the value of the estate.

So, financial planners need to be inform clients that heirs inheriting assets or receiving gift of assets from India are still subject to taxes in US if they are residents or citizens there.

United Kingdom ~ Under the current rules, levy of an inheritance tax depends on the size of the estate. If the value of the total assets is less than £325,000, there is no inheritance tax. Above this threshold, the charge is 40%. Estate includes property, money and possessions. So for heirs of net-worth individuals holding property investments in the United Kingdom may be subject to inheritance tax.

Due to double tax treaty between the United Kingdom and India, individuals are not required to pay double taxes, that is taxes in both India and United Kingdom, on the assets inherited. However, individuals need to check that the requirements have been met to avoid double tax while estate planning.

Australia ~ Just like in India, inheritance tax in Australia was abolished. However, a variety of taxes like capital gains tax may be payable depending on the type of gift received under the will and the way in which the gift was received by the beneficiary. So families need to keep in mind that heirs might still have to pay some levies as income earned from overseas sources can be taxed in Australia.

Canada ~ While Canada does not have an estate duty or inheritance tax, beneficiaries still have to grapple with a tax bill. Under Canadian tax laws, a person's estate is deemed to be sold at death. If the fair market value of the property exceeds its cost for tax purposes, the person will realize a capital gain upon death. So a deemed disposition tax can be levied on assets unless the assets are transferred to a surviving spouse through the form of a will or other estate planning tools.

Singapore ~ Estate duty was removed in 2008 to encourage local and overseas investors to hold their assets in the city-state.

To conclude

Estate planning is a complex process and understanding the nuances of the effects of taxation will help clients realize that they cannot do it alone - it has to be done with the help of specialist team that includes a financial planner.

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