Estate Tax in India: The Right Question to Ask

Thirty- two years after it was abolished in India, Estate Tax is again under the limelight. Even though the murmurs of the Estate Tax returning had never quite died, in recent times, the noise has grown louder about its comeback.

What is an Estate Tax?

An Estate Tax is a tax levied upon the estate (movable and immovable assets) of a deceased person when it is passed on as inheritance. We had covered Global Estate Tax in our earlier article here.

Different countries have several variations of the Estate Tax in terms of its name, incidence, rates, exclusions, liability of payment etc, with the result being similar; that in all cases, the inherited estate is not received in entirety by the beneficiary, but a sizable chunk of it must be paid to the State.

Global Outlook

Globally, Japan, South Korea, France, US and UK are among the nations with the highest rates of Estate Tax with peak slab rates being as high as 40% to 55%. Thirteen countries or jurisdictions have repealed their estate or inheritance taxes since 2000[1]. These include developed countries like Austria and Portugal and Asian countries such as Singapore and Hongkong. On the other hand, nations such as Thailand have introduced Estate Tax to increase the tax kitty as recently as last year[2].

Debate in India

Currently, there is no Estate Tax levied in India. India had the Estate Duty Tax regime from 1953 to 1985. However, it was abolished in 1985 with the widespread realization that Estate Tax had failed to bear the expected results.[3] Prior to removal, estate duty was levied at an incremental slab basis ranging from 7.5% to 40% of the principal value of the estate. The exemption limit was meagre, and deductions were few and far in between.

Of late, the voices in favour of Estate Tax comeback commend it as a weapon to boost the revenue. According to Wealth-X’s The World Ultra Wealth Report 2017, the number of the UHNIs, individuals with net worth of INR 200 crores or more, grew by 8.5% in the last year in India[4]. Furthermore, as per Knight Frank’s ‘The Wealth Report 2017’, in India, the number of individuals with $30 mn in net assets is pegged to grow at 150% in the next decade[5]. Those in support of the Estate Tax point that the simple logic at work here would be to tap into this increasing wealth of the rich to generate revenues.

It is debatable whether India indeed requires Estate Tax levy to improve its tax kitty. The fact that 50% of India’s population is under 25 years of age at present and the dependency ratio is predicted to be only 0.4 by 2030[6], India is sitting on a huge demographic dividend that could translate into investments and incomes, thereby adding tremendously to the revenues; thus, negating the need for any such levy.

Those making a case for the return of the Estate Tax also see it as a tool to reduce wealth disparity. India’s top 10% have steadily grown to owning about three-quarters of the country’s wealth. In fact, the top 1% hold nearly half of India’s wealth[7]. No one could deny that wealth concentration is a biting reality for India. But, let us not forget that for three decades when Estate Duty was in force, it did not result in much of social parity and had to be done away with.

So, what if the Estate Tax comes back?

In what form, when, at what thresholds and what rates may Estate Duty comeback (if it does, that is) is anyone’s guess. For those who continue to be concerned with the rising conjectures around the revival of Estate Taxes in India, it will be of interest to assess ways to adapt global planning and get a picture of the erstwhile Estate Tax regime in India to minimize the risk of wealth depletion.

Here are a few widely used global Estate Planning practices and tools:

1. Globally, structures such as trusts and foundations are frequently used as optimization tools towards Estate Tax and other similar implications. Such structures may not only help avoid wealth depletion but also ensure preservation and transition of the same to the next generation. However, this requires careful, timely planning and one also needs to strike a balance between reducing risk of capital depletion and dilution of control.

2. Lifetime Gifting is another prevalent solution in jurisdictions that levy Estate Taxes. Usually, it cannot be used in isolation as Estate Taxes are often paired with gift tax to avoid circumvention by simply transferring the property prior to death. In fact, the erstwhile Estate Tax regime in India taxed any Estate that was given as a gift within a period of two years before death or gifts made in contemplation of death.

3. Insurance policies for covering Estate Tax implications are quite common in the US and result in lot of sales for insurance companies. India too had insurance policies providing for cover against Estate Tax liabilities while the country had an Estate Tax regime. Since abolishing of Estate Tax in the 80s, India does not have any such policies. Additionally, an Estate plan is a pre-requisite and such policies are used in synchronisation with a broader succession plan.

4. Charitable Transfers or Gifts to charities during lifetime or upon demise can reduce the size of the estate and thereby reduce estate taxes. Such gifts or transfers usually provide the added benefit of an income tax deduction.

5. Utilization of exempted assets and thresholds is something which can be planned only once the details of the regime are out. There is Business Property relief (BPR Relief)[8] towards business holdings in UK, in spite of its otherwise high Inheritance tax rate and a low threshold. Asset planning as per the prevalent regime is always possible during one’s lifetime.

6. It is often seen that large illiquid estates end up inviting serious estate tax implications. One needs to be cognizant of this and avoid amassing huge illiquid assets to manage likely outflows towards Estate Taxes. The year 2006 in Britain saw the sale of famous Blencathra mountain to Laxmi Mittal for realising a staggering amount of 1.75 million pounds towards inheritance tax following the death of the 7th Earl of Lonsdale[9].

Irrespective of the speculation around the return of Estate Taxes, an efficient Estate plan is a must, and requires careful consideration of legal, tax and exchange control related aspects apart from the family situation.The question most wealthy Indian families should indeed be asking is not if they have planned for Estate Tax but if they have planned for uncertainty?