The final draft of the Finance Bill should make people who use family trusts for tax planning happy. The original proposal to tax gifts (in the Bill as announced at the time of the Budget) has been amended. However, the provision to tax dividends received in excess of ~10 lakh by these trusts remains.
For the past few years, there have been rumours that the government might impose an inheritance tax, as is prevalent in the US and the UK. This means a portion of a person’s estate would be taxed (in the US and UK, this tax goes as high as 40 per cent and is chargeable on amounts above certain threshold levels) and only the balance would be transferred to heirs. This year, reacting to such rumours, many high net worth individuals (HNIs) formed trusts and transferred their assets to these, ahead of the Budget. “Once assets have been moved into a trust, they stay there in perpetuity, and don’t attract inheritance tax,” says Girish Ahuja, a Delhibased chartered accountant and director at State Bank of India.
The proposal to tax gifts to trusts, as announced in the Budget, made many anxious about their decision to form a trust. Before the Budget, if a property was received without adequate or no consideration (in other words, a gift), only individuals and Hindu Undivided Families (HUFs) had to pay tax on it. The Finance Bill, as introduced in the Lok Sabha, proposed to extend the taxation to all categories of taxpayers. The only exceptions were to be made for charitable, educational, medical, hospital trusts and institutions. “Intentionally or unintentionally, this would have negatively affected the taxation of family trusts. The trust would have been subject to tax when it received property from the settlors of the trust,” says Jiger Saiya, partner-direct tax, BDO India.
However, the final Bill as passed by the Lok Sabha proposes to exempt trusts created or established by an individual for the benefit of relatives. “This is welcome and in line with the
IIIIIFinance Bill 2017 had originally proposed taxing gifts made to trusts This meant that if assets were transferred to a trust, a tax would be levied on the transfer This would have made trusts less attractive for succession planning The final Bill exempts trusts formed for relatives from taxation Tax planning through trusts will, however, not work as dividend in excess of ~10 lakh will be taxed at 10 per cent overall scheme of taxation of trusts, whereby settlement of property on to a trust is not considered a taxable transfer,” says Saiya. The trust structure would have become tax inefficient, had the original proposal regarding gifting been enacted. “By excluding properties received by private trusts from the new provisions, the government has ensured that genuine cases of structuring of assets among family members are not affected merely for using a trust structure,” says Saiya.
In the matter of dividend income, however, the outcome has not been as favourable for trusts. HNIs often put their shares in a trust. Until now, the dividend was received by the trust and hence was not taxable. Prior to the Budget, the provisions relating to this tax on the super-rich were applicable to resident individuals, HUFs and firms only. The Finance Bill proposes to extend this tax to all categories of taxpayers. “Now, dividend received by anyone other than a company or a charitable registered trust, will be taxable if it exceeds ~10 lakh,” says Ahuja. The rate of taxation will be 10 per cent on the amount in excess of ~10 lakh.