Di­vi­sion of Fam­ily Trusts May Now Face Cap­i­tal Gains Tax

Fear of higher tax has put on hold sev­eral fam­i­lies’ plans for a split

The Economic Times - - Economy: Macro, Micro & More - Sachin.Dave @times­group.com

Mum­bai: A Bud­get pro­posal has forced two sib­lings to re­think their de­ci­sion to split their real es­tate fam­ily busi­ness. The Mum­bai-based broth­ers are wor­ried that trans­fer­ring as­sets from their fam­ily trust and trans­fer­ring and swap­ping shares from their un­listed com­pa­nies could now at­tract tax which, as per the bud­get pro­posal, will be any­where between 20% and 30% if done be­low a fair mar­ket value. They have now ap­proached lawyers and ad­vi­sors to know the real im­pact.

“The Bud­get pro­posal has cre­ated an is­sue for fam­ily set­tle­ment wherein if the shares of a pri­vate com­pany are owned by a fam­ily trust and are trans­ferred to a ben­e­fi­ciary at a value lower than fair mar­ket value. The fam­ily trust shall be obliged to pay tax on the dif­fer­en­tial amount bet- ween fair mar­ket value and the value at which such shares were trans­ferred,” said Hemal Me­hta, part­ner, Deloitte Hask­ins & Sells.

Ac­cord­ing to ex­perts, in a fam­ily set­tle­ment, shares are al­ways trans­ferred at a lower value. This would cre­ate prob­lem for fam­i­lies that are look­ing to divide busi­ness or split fam­ily wealth.

“Any trans­fer of un­quoted equity shares at a price lower than the fair mar­ket value will only seek to shift the tax bur­den from the re­cip­i­ent/trans­feree (un­der Sec­tion 56(2) (VIIA)) to the trans­feror,” said Prem Ra­jani, man­ag­ing part­ner, Ra­jani As­so­ciates.

In­dus­try in­sid­ers say that the fear of tax has put on hold sev­eral fam­i­lies’ plans of a split. For in­stance, the grand­chil­dren of a Kolkata-based pa­tri­arch have put on hold their plan to split the as­sets, in­clud­ing a listed and an un­listed com­pany, after the Fe­bru­ary1bud­get an­nounce­ment.

Le­gal ex­perts say there are court judg­ments where it has been clar­i­fied that there can be no tax on fam­ily di­vi­sions, but it’s not part of the law. So, the bud­get an­nounce­ment may over­ride th­ese ear­lier judg­ments. Also, the court judg- ments speak only about di­vi­sion of wealth between ‘first de­gree’ of blood rel­a­tives, so cousins fight­ing for grand­par­ent’s prop­erty will any­way have to pay cap­i­tal gains.

In­dus­try track­ers say this will also lead to many fam­i­lies tak­ing a relook at their fam­ily trust struc­tures. Ex­perts point out that two types of trusts are be­ing cre­ated or re­struc­tured—the first is by young en­trepreneurs who have made mil­lions through start-ups for ef­fec­tive wealth man­age­ment and suc­ces­sion plan­ning, and the sec­ond type is by the tra­di­tion­ally rich, mostly those who are grow­ing old and may not be able to man­age their as­sets and in­vest­ments, both in In­dia and overseas.

Ex­perts say that in cer­tain cases cap­i­tal gains tax may also be ap­plied to fam­ily trusts.

“In case of set­tle­ment of fam­ily trust, where shares are trans­ferred to the trust and if STT is not paid at that time and now, or sub­se­quently, any fam­ily split hap­pens, then it may trig­ger the pay­ment of cap­i­tal gains tax, al­though there are cer­tain grey ar­eas and needs clar­i­fi­ca­tions,” said Vish­was Pathak, di­rec­tor, Uni­ver­sal Trustees, a firm that spe­cialises in man­ag­ing fam­ily and cor­po­rate trusts.

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