India: Estate Taxes: Should You Be Concerned?

Last Updated: 14 September 2017
Article by Metasis Legal

What is an Estate Tax?

An Estate Tax is levied on the inherited portion of an estate of an heir if the value of such an inheritance exceeds an exclusion limit which has been set by the Law of the land. Different countries have several variations of it, and a different nomenclature, ranging from death tax, transfer tax, succession tax to inheritance tax. While there may be different persons liable to pay the same, the bottom line is that all these taxes are broadly similar, generally being triggered by death. In all cases, the inherited estate is not received in entirety by the beneficiary, but a sizable chunk of it has to be paid to the State.  Now the liability of payment, i.e. who will pay the tax, may be different in each case.  Estate taxes are levied on the net value of property owned by a deceased person on the date of their death. In contrast, inheritance taxes are levied on the recipients of the property. All these taxes are generally paired with some kind of gift tax so that they cannot be avoided by simply transferring the property prior to death.

Usually, there are exemptions upon the estate being transferred to the surviving spouse, but again, upon the demise of the surviving spouse, more often than not, these taxes catch up.

In some countries, the applicable inheritance tax could be as high as 55% of the Estate post permissible deductions, making it essential for the Estate owner to plan well in advance.

Estate or Inheritance tax regimes in some large countries:

USA: The US imposes an estate tax on the transfer of a decedent's worldwide estate for its citizens and residents – which means in case of persons having a US citizenship the worldwide estate is liable to pay the estate tax irrespective of them being domiciled or residents in USA. For an individual who is neither a US citizen nor a US resident (i.e., a non-resident alien), the gross estate includes only US situs property (including real estate and financial instruments) owned at death.

The rate of Estate taxes in USA peaks at 40%, with the estate and gift tax exemption threshold being $5.49 million per individual for 2017. The exemption doubles to $10.98 million for married couples filing joint tax returns. Besides the Estate tax being a federal tax, several states have a state-level estate tax over and above the federal limit.

United Kingdom: UK has a unified regime of estate and gift tax called inheritance tax (IHT). IHT applies to the value of an individual's estate when he or she dies (in which case he or she is deemed to make a transfer of the whole estate immediately before such time) and to certain transfers or gifts made during the individual's lifetime. The tax applies on the basis of the loss to the donor's estate that arises by reason of the transfer of value.

The taxation of individuals in the UK is largely determined by their domicile status or at times by their residential status, although residence is less important for IHT. IHT is levied on the worldwide estate of a decedent who was domiciled in the UK. While UK recognises the concept of domicile as a country considered as permanent home, IHT is applicable (with some variations) to deemed domiciled persons as well. The deemed domiciled and non-domiciled taxation laws have undergone significant changes in 2017, requiring careful reassessment of even existing planning in place, if any.

IHT is also levied on the UK sited assets of a person who was not domiciled in the UK. One should be aware and plan well before eyeing and buying that hot London property!

The standard rate of the Inheritance tax is set at 40% which is charged on the estate which is above the threshold, which is 325,000 pounds currently. If the estate is given to the children or grandchildren, the threshold increases to 425,000 pounds.

Canada: Canada does not have an Estate Tax but, after the death of a person, their estate is considered to have devolved upon their spouse and if there is no spouse then in that case, the deceased is considered to have sold all of his/her property at fair market price immediately before his death. It often results in the recognition of some amount of gain or loss which is included in computing income in the year of death. These deemed gains are then taxed at the applicable capital gains tax rates.

The taxation of individuals in Canada is determined by residence. The deemed disposition at death applies to the worldwide assets of all Canadian residents at the time of death. In addition to the judicially developed tests, the Canadian Tax Act has provided statutory tests that may deem a person to be a Canadian resident. In the case of an individual, the key rule is that a person is deemed to be a resident for any tax year in which he or she spends 183 or more days in Canada. Separate rules apply if the person is considered a resident of more than one country.

Non-residents may also be liable for tax at the time of death if they own taxable Canadian property.

Situation in India:

Currently, there is no Estate Tax levied in India. India had the Estate Tax regime from 1953 to 1985. However, it was removed in 1985 with the realisation that Estate Tax had failed to bring equilibrium in the society.4 Prior to removal, estate duty was payable on a slab basis ranging from 7.5% to 40% of the principal value of the estate.

It is noteworthy that since past few years, there has been widespread speculation that Estate tax will be reintroduced in India, but no formal proposal has yet been tabled before the Parliament.

Is there a silver lining?

Yes, if planned well in advance, the Estate or inheritance taxes may be legitimately minimised to a significant extent. Depending on each country's tax incidence and the assets involved, the planning could vary from simple gifting to setting up of intricate structures weaved in to bring tax efficiency. Such cases should be evaluated by experts who are well versed with the consequences of the alternatives chosen.

When should you be concerned:

With the global tax scenario becoming dynamic as ever and governments getting keener to shore up their fledgling tax kitties, it is of utmost importance that one remains aware that certain scenarios can attract Estate or inheritance taxes and plan in advance for the same. We are listing below a few situations in which one should be more careful and rule out the applicability of any of these levies, or alternatively, plan towards most efficient pay-outs:

  • You have, or plan to acquire the citizenship of some other country
  • You propose to buy a property in other country
  • You desire on doing business in some other country
  • Your spouse or children have a foreign citizenship
  • Your children are studying abroad and may settle down outside their home country
  • You are employed in a foreign country
  • You are likely to inherit property from someone who is staying abroad
  • You wish to bequeath your property to someone who is staying abroad  
  • Your legal heirs are settled outside your home country
  • You propose to settle abroad while continuing to be a citizen of your country

This is not an exhaustive list, but more likely scenarios where if not planned, the estate may eventually be liable for taxes, instead of it passing on to your rightful heirs in entirety. In the event of two or more jurisdictions involved, a better way would be to engage with experts having an understating of multiple jurisdictions to bring out overall tax efficiency in a person's estate.

References 

1 https://www.irs.gov/pub/irs-pdf/i706.pdf

2 https://www.gov.uk/inheritance-tax/overview

3 https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4111-canada-revenue-agency-what-following-a-death/canada-revenue-agency-what-following-a-death.html

4 http://pib.nic.in/archive/docs/DVD_46/ACC%20NO%20917-BR/FIN-1953-10-06_1502.pdf

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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