Six Actions to Take Before the Inheritance and Gift Taxes Come into Force
The Inheritance Tax Act B. E. 2558 ( 2015) and the Revenue Code Amendment Act ( No. 40) B. E. 2558 ( 2015), which amends the Thai Revenue Code’s treatment of personal income tax on 1) gifts received either as maintenance or support based on a moral obligation or received as part of a ceremony or upon a traditional occasion, and 2) income derived from gratuitous transfers of immovable property to legitimate children (“Gift Tax”), were published in the Thai Royal Government Gazette on August 5, 2015.
The Acts will come into force on February 1, 2016, representing 180 days from the publication date.
Therefore, during the period from now until February 1, 2016, income derived from the receipt of assets via inheritance or bequest remains exempt from personal income tax and is not subject to inheritance tax.
Furthermore, subject to prescribed conditions under current law, income derived from certain types of gratuitous transfers and gifts received from now until February 1, 2016 also still remains exempt from personal income tax.
As such, this period provides a window of opportunity for those contemplating estate and wealth management planning to execute their plans in a manner which considers the implications of these new regimes.
As the Inheritance Tax Act and the Amendment Act will shortly come into effect, clients may want to consider taking the following six actions when making arrangements for the management of their assets.
1. BECOME FAMILIAR WITH THE NEW INHERITANCE AND GIFT TAXES CONCEPTS AND RULES
Clients should understand the general frameworks and rules for both the inheritance tax and Gift Tax so that they are better able to manage asset holdings and understand the potential tax implications of asset dispositions or wealth transfers. With regard to the inheritance tax, clients should gain a general understanding of which types of assets will be subject to inheritance taxation, when a recipient of such assets ( either by inheritance or bequest) will be liable for inheritance tax, and if any applicable exemptions may apply ( such as the spousal exception). With regard to the Gift Tax, clients should obtain a general understanding of who is considered the taxpayer under the Gift Tax rules, what kinds of gifts received may be exempt from personal income tax, and the amounts of the income received which are exempted from Gift Tax.
Please refer to T- AB Magazine Vol. 4/ 2015, page 30, published in mid- September of this year, for detailed information on the Inheritance Tax and Gift Tax.
2. PREPARE A LIST OF ASSETS THAT WOULD BE SUBJECT TO INHERITANCE TAX AND PREPARE A WILL ACCORDINGLY
Preparation of a list of assets that would be subject to inheritance tax will help clients calculate the aggregate value of taxable assets, as well as inheritance tax implications for their heirs or other people who will receive these assets. If clients discover through the list preparation process that they have or are likely to have assets with an aggregate value exceeding Baht 100 million in the future, then they may want to consider transferring portions of these assets to others during their lifetime so as to take advantage of Gift Tax exemptions valued up to Baht 20 million for ascendants, descendants, and spouse, or up to Baht 10 million for other cases, each year under certain prescribed criteria.
In addition, clients should also consider preparing a will in order to manage the disposition of their assets upon death taking into consideration the inheritance tax that may be payable by heirs upon receipt of such assets.
For example, an individual may consider allocating certain taxable assets not exceeding Baht 100 million to certain heirs and then allocating any remaining taxable assets to his or her spouse, which would not be taxable in the hands of the spouse. In addition, where an individual would like to donate part of his or her estate to charity, the will should clearly state this intention to donate such assets to the particular charity, as such donations are not subject to inheritance tax in the hands of the recipient.
3. CONVERT ASSETS THAT WOULD BE SUBJECT TO INHERITANCE TAX INTO NON- TAXABLE ASSETS
Where clients have assets that would be subject to inheritance tax, these individuals may want to consider converting such assets into other types of assets which would not be subject to inheritance tax. For example, the individuals may consider buying gold with cash held in a deposit account because gold is not categorized as an asset that would be
subject to inheritance tax. In addition, as income received by inheritance or bequest is exempt from personal income tax, the heirs who inherit or bequeath the gold will also be exempt from personal income tax. Care should be taken when undertaking such planning to ensure that any other potential tax implications that may arise from such transactions are considered, along with the impact of depreciation of certain types of assets.
4. TRANSFER INHERITABLE TAXABLE ASSETS TO CHILDREN DURING ONE’S LIFETIME
Gratuitous transfers of immovable property, including land, from a parent to legitimate children before February 1, 2016 are exempt from personal income taxation without limitation. However, from February 1 onwards, the transferor parent will become taxable on such transfers to the extent that the aggregate value of the property transferred exceeds Baht 20 million and will be subject to personal income tax at the rate of 5 percent on this excess portion.
In cases where clients do decide to transfer land to their legitimate children, the children should consider registering a right of usufruct on the land in favor of the transferor parent, and may also designate through the will to bequeath the land to parents.
With reference to assets other than immovable property, complete and valid legal transfers of such assets to children before February 1, 2016 may be considered gifts received as maintenance or support pursuant to a moral obligation and recipient children should therefore be exempt from personal income taxation on receipt of the gift without limitation. The transferor parent will have removed these gifted assets from their ownership and, correspondingly, their estate. In this case, the taxable assets to be inherited by the children will reduce, and the inheritance tax should reduce accordingly.
5. SET UP A FAMILY HOLDING COMPANY AND TRANSFER SHARES TO CHILDREN
Setting up a family holding company has many advantages, including the ability to maintain the ownership of operating company shares within a client’s family. This may be of particular concern, however, where shares are listed on the Stock Exchange of Thailand ( SET), as clients may be concerned that their children will later sell the shares on the SET.
In addition, before February 1, gratuitous transfers of shares in a family holding company to children may qualify as gifts given as maintenance or support pursuant to a moral obligation, which should be exempt from personal income tax liability for the recipient children. By contrast, if such shares are transferred from February 1 onwards, the recipient children will be subject to personal income tax on the portion of the value of the shares transferred which exceeds Baht 20 million.
6. SET UP AN OFFSHORE INVESTMENT OR HOLDING COMPANY UNDER A TRUST STRUCTURE
The Bank of Thailand ( BOT) has set out relaxed criteria to promote Thai direct investment abroad, whereby a Thai- based individual is permitted to remit unlimited sums of money outside Thailand for the purposes of setting up an offshore company or purchasing at least 10 percent of the shares thereof without being required to obtain prior approval from the BOT. Thus, clients may want to consider setting up an investment or holding company in a foreign country. Note that shares of such an investment or holding company are still considered inheritable taxable assets and may be subject to inheritance tax. As such, clients may want to consider setting up an offshore ( i. e., non- Thai) trust to hold such shares.
In setting up the offshore trust, ownership of ( i. e. title to) assets is transferred to a trustee for the purposes of management and distribution of interests or income derived from such assets to the beneficiaries. The assets, having been transferred to the trustee, are no longer considered as part of the parent’s estate upon their passing, and should not be subject to inheritance tax accordingly.
Kitipong Urapeepatanapong is Partner and Jonathan Blaine is Tax Consultant at Baker & Mckenzie. They can be contacted at Kitipong. Urapeepatanapong@ bakermckenzie. com and Jonathan. Blaine@ bakermckenzie. com.