Trust Structures Catering to India-UK Family Office Investments
By CA Raghu Marwah & CA Anjali Kukreja,R.N. Marwah & Co LLP
India and United Kingdom (UK) have a strong bilateral investment relationship. Top five investors of UK include India whereas UK ranks on top of the G20 investors in India. There were rife speculations that political and economic uncertainty in UK over Brexit would deter Indian investments i.e. the Indian companies would hold back on UK expansion plans or at least defer opening new offices in UK. However, Indian investments have continued to show great confidence in UK and have grown very strongly amidst the ever changing political and economic scenario of UK.
The investment choices that a family office may evaluate would depend upon specific family circumstances. Say family with multiple generations, having commercial and residential properties distributed locally or globally may require a comprehensive business transaction restructuring in a way that the family is able to do business together as one unit but in case of any conflict of interest; risk of expensive litigation and family split is ruled out. This goal can be achieved through means of drafting and executing legal agreements containing clear terms (like defined share) in situation of dispute. Family offices would usually require services of tax and legal professionals for consultancy over such family business/estate planning for kind of agreements that can be executed along with its legal drafting. Family offices also require taking into ambit of their planning philanthropic goals alongside wealth/investment goals of a family. These decisions are often not as simple as it may look. These decisions are often interlinked.
These days a common wealth planning evaluation is whether to convert a family office to a private trust or a private trust company. A Private trust company is created with the aim of acting as a corporate trustee to the family trust or usually number of trusts (family branches) of one family. Considering that a corporate trustee is usually a professionally hired third party, there is usually less conflict or claim of partiality in execution of the trust deed. A private trust company may offer advantages like retention of family control, protected privacy and equitable distribution of family wealth even under unplanned life events.
Family trust structures these days often comprise of a master trust with multiple sub-trusts in place of having multiple trusts. This provides clear demarcation of family wealth as well as family protection against expensive legal disputes arising due to conflict of interest amongst small sub-families (say, father’s family and son(s) families) within the big family. Master trust and sub-trusts could be set up with different trustees and beneficiaries with say one person (head of the family) being the settlor.
Tax, regulatory and legal considerations on transition of assets to next generation require careful consideration before putting family wealth in to trust structure. Broadly following requires to be considered:-
Income Tax Implications in hands of settlor, trust and beneficiariesIdeal location for a setting up a trust structure would be a jurisdiction where there is no tax on transfer of assets by settlor to trust, no tax in the hands of the trust on its income and minimal tax in the hands of the beneficiaries on receipt of trust income. Guernsey is emerging as an attractive jurisdiction for setting up family trusts.
Stamp Duty on transferStamp duty is usually attracted on the trust deed (being the instrument of transfer) depending on the value of the assets transferred. Ideally, there is no further duty on redistribution of assets to beneficiaries in future.
Foreign Exchange RegulationsIn India, Foreign exchange regulations are usually attracted when either an overseas trust is created by a resident (transferring its foreign assets) or Indian trust is created with beneficiaries including non-residents. In UK, there are no strict laws regulating exchange controls in and out of UK.
Estate Duty/Inheritance TaxIn UK, estate duty is payable on the value of the inherited portion exceeding the prescribed exclusion threshold under the UK laws. Further, UK laws relax the taxable threshold limit on distribution of the inherited assets to certain persons (including spouse, children, grandchildren, charity, community amateur sports club, civil partner) in prescribed manner.
In India, there is no estate duty on inheritance as of now (it was abolished more than three decades back). As of now, wealth preservation for a family seems simpler in India as compared to UK. However, it would be interesting to mention here that currently re-introduction of inheritance tax is being anticipated in India and may find its place in the Union Budget on July 5, 2019.
After taking all the above in to consideration, leading family offices in India as well as in UK resort to using trust structures as an important tool for family succession planning as well as family wealth preservation. These structures not only absolve the beneficiaries from legal hassles of getting a probate and a succession certificate from court but also address the family concerns with respect to equitable distribution of wealth for protecting dependent children, widow or special-needs family member. Also, creation of private family trusts offers solutions for family wealth protection during unforeseen unpleasant situations whether on work front (a business failure) or on personal front (divorce). Business losses as well as divorce settlements often make all estate and succession planning complex, especially as these situations create concerns for protection of children and sometimes spouses as well. Usually, assets that couples agree should be transferred to children, are set aside and transferred to trusts created with children as key beneficiaries. Provisions of funds are allocated for specific purposes like education, health, marriage and general subsistence of children. These determinate trusts usually end when children achieve pre-set age of say, 30, 35, and 40 as agreed. This way family offices through family trust structures offer solutions catering to wealth retention goals of family while simultaneously ensuring financial security in unforeseen socio-economic circumstances in life.
Raghu MarwahR.N. Marwah & Co LLP, Bangalore, New Delhi, India
T: +91 114 319 20 00
Anjali KukrejaR.N. Marwah & Co LLP, Bangalore, New Delhi, India
T: +91 114 319 20 00
The Authors are expert in the field of International Tax and specialize in family office advisory, especially targeted towards India-UK Investments.
Published: August 2019 l Photo: Mazur Travel - stock.adobe.com