24
A case study in cross border estate planning: the US, the UK and India 19 January 2012 Presentation to: STEP New York By: Mark Summers of Speechly Bircham AG and Sanjvee Shah of Speechly Bircham LLP

A case study in cross border estate planning: the US, the UK and India 19 January 2012 Presentation to: STEP New York By: Mark Summers of Speechly Bircham

Embed Size (px)

Citation preview

Page 1: A case study in cross border estate planning: the US, the UK and India 19 January 2012 Presentation to: STEP New York By: Mark Summers of Speechly Bircham

A case study in cross border estate planning: the US, the UK and India19 January 2012

Presentation to:

STEP New York

By:

Mark Summers of Speechly Bircham AG

and

Sanjvee Shah of Speechly Bircham LLP

Page 2: A case study in cross border estate planning: the US, the UK and India 19 January 2012 Presentation to: STEP New York By: Mark Summers of Speechly Bircham

US family – UK issues

• Brad and Janet both US citizens, Californian resident

• Have settled Community Property Trust, and IDGTs for their children and issue.

• Daughter Anna is UK resident with fiancé

• Son John, Connecticut resident, is considering going UK resident with his family, is married to a UK citizen, Susan, with children

• John is about to settle a living trust, ILIT and a GRAT

Page 3: A case study in cross border estate planning: the US, the UK and India 19 January 2012 Presentation to: STEP New York By: Mark Summers of Speechly Bircham

US trusts: Brad and Janet

• As non-UK domiciled grantors, trusts will be ‘excluded property’ ie Inheritance Tax (IHT) free for the duration of the trust

• No UK assets should be held directly due to IHT ‘relevant property regime for trusts – 20% tax on entry and 6% tax every ten years thereafter although Article 5(4) 1978 US/UK Treaty may relieve the 6% tax charge

• Trusts will be non-UK resident unless all trustees are UK resident

• No UK income and capital gains taxes except 10% withholding on UK dividends

• BUT distributions and benefits provided to UK resident beneficiaries matched with historic income and gains

• Income tax rates 40% over £35k and 50% over £150k; CGT is 28% but UK equivalent of throwback can grow it to 44.8%

Page 4: A case study in cross border estate planning: the US, the UK and India 19 January 2012 Presentation to: STEP New York By: Mark Summers of Speechly Bircham

US Trusts: Brad and Janet (cont’d)

• Under Exchange of Notes to Article 23 2001 US/UK Treaty only the grantor can claim credit for tax paid by beneficiary (and so may be out of time in the US)

• After grantors’ deaths, income and gains distributed annually may obtain treaty relief

• No credits available for state income taxes• A UK resident non-UK domiciled beneficiary may be able to defer the tax

indefinitely if a remittance basis user and does not remit the funds or benefit

• US mutual funds are non-reporting in the UK and so income tax rates charged on gains

• Municipal bonds are ordinary income and not exempt in the UK• Gains for the UK are calculated by reference to GBP Sterling: currency

fluctuations therefore caught in both US and UK but with no tax credits (nb. currency gains on cash are not taxable in the UK from 6 April 2012)

Page 5: A case study in cross border estate planning: the US, the UK and India 19 January 2012 Presentation to: STEP New York By: Mark Summers of Speechly Bircham

US Trusts: Brad and Janet – possible strategies

• Inherent tension between keeping wealth out of Estate / GST / Inheritance Tax net and distributing income and gains after grantors’ deaths in order to avoid double taxation

• Consider spinning off a portion of wealth into non-grantor dual US/UK resident/domestic trusts that may be accessed by UK resident beneficiaries during lifetime:

– Trusts will bear higher UK tax rates on income and gains– Trusts will gain full credits for US federal income tax– ‘excluded property’ status will not be jeopardised

Page 6: A case study in cross border estate planning: the US, the UK and India 19 January 2012 Presentation to: STEP New York By: Mark Summers of Speechly Bircham

US Trusts: John – additional points

• If John settles trusts before he becomes UK resident (and does not add funds while UK resident) and is sole trustee, trusts will become UK tax resident on arrival – no remittance basis

• If John appoints an additional trustee who is non-UK resident then the trust will remain non-UK resident

• If John settles trusts once resident in the UK then all trustees must be non-UK resident for trust to be non-resident

• CGT ‘mark to market’ export charge if trust goes non-UK resident and there is no rebasing upon a trust becoming UK resident – John could avoid this provided that a majority of trustees are US resident upon John becoming UK resident (or when the trust is set up when John is UK resident) and a treaty claim is made

Page 7: A case study in cross border estate planning: the US, the UK and India 19 January 2012 Presentation to: STEP New York By: Mark Summers of Speechly Bircham

US Trusts: John – additional points (cont’d)

• Whether the trusts should be UK resident or not will depend upon:– How long John will be in the UK– If longer than 7 years whether he will pay the £30,000 RBU charge

(increasing to £50,000 from 6 April 2012 for those resident in the UK for more than 12 years)

– Whether he is likely to remit non-UK funds in the trust to the UK

• GRAT – watch the drafting of the annuity payment, the entire annuity including the capital repayment element can be converted to income for UK purposes – if the trust is UK resident then the income would also be UK source (50% income tax!)

• ILIT – if life policy is whole of life and not a term policy then UK income tax becomes chargeable on the death of the life assured if UK resident at time of death with no remittance basis

Page 8: A case study in cross border estate planning: the US, the UK and India 19 January 2012 Presentation to: STEP New York By: Mark Summers of Speechly Bircham

John’s wife Susan

• May well be UK domiciled by origin

• Therefore subject to IHT on a worldwide basis

• She must not add funds to trusts (relevant property regime will apply) – watch jointly held assets, community property and try and keep value out of her estate

• Limited spouse relief (marital deduction) for IHT of £55,000 and no UK equivalent of QDoT exists – best strategy is a fully discretionary Will

• Children will probably be dual US and UK citizens but will take John’s non-UK domicile – query might they later expatriate from the US?

Page 9: A case study in cross border estate planning: the US, the UK and India 19 January 2012 Presentation to: STEP New York By: Mark Summers of Speechly Bircham

UK/Indian planning

• Anna (US citizen) engaged to Rahul (British citizen, Indian domiciled)

• Rahul has been UK resident for 15 years

• Anna has been UK resident for 6 years

• Anna and Rahul plan to leave the UK in the next few years to live in India via a short stay in Singapore/Dubai

Page 10: A case study in cross border estate planning: the US, the UK and India 19 January 2012 Presentation to: STEP New York By: Mark Summers of Speechly Bircham

Tax status

• Anna

– foreign domiciled, UK resident

– remittance basis of taxation

– £30,000 annual charge from 8th year of UK tax residency (increasing to an annual charge of £50,000 from 6 April 2012 for those resident in the UK for 12 years or more)

• Rahul

– foreign domiciled, UK resident

– almost “deemed domiciled” for inheritance tax purposes

– pays £30,000 to be taxed on the remittance basis each year and will pay £50,000 annual charge from 6 April 2012

Page 11: A case study in cross border estate planning: the US, the UK and India 19 January 2012 Presentation to: STEP New York By: Mark Summers of Speechly Bircham

Inheritance tax planning

• Rahul

– Domicile mismatch once Rahul is deemed domiciled for some years

– Limited spouse exemption of £55,000

– Nil rate band (£325,000)

– BUT favourable UK/Indian DTT

• avoid inheritance tax on non-UK assets via appropriate Wills

• Anna

– US tax efficient Wills

– QDOT in favour of Rahul

Page 12: A case study in cross border estate planning: the US, the UK and India 19 January 2012 Presentation to: STEP New York By: Mark Summers of Speechly Bircham

Offshore trusts

• Alternative or in addition to tax efficient Wills

• Rahul could establish one or more offshore trusts to hold his non-UK assets

• While UK resident

– income tax transparent

– wrapper for capital gains tax purposes

– excluded property for inheritance tax purposes

• Advantageous pre-arrival planning from an Indian tax perspective

– once Indian resident, taxed on a worldwide basis

– possible to avoid tax on distributions of non-Indian situate assets held in a trust established before becoming Indian tax resident

Page 13: A case study in cross border estate planning: the US, the UK and India 19 January 2012 Presentation to: STEP New York By: Mark Summers of Speechly Bircham

Offshore trusts (cont’d)

• Wealth protection

– terms of trust

– governing law

– letter of wishes

– one or more trusts

– protecting the “crown jewels”

– nuptial settlement

Page 14: A case study in cross border estate planning: the US, the UK and India 19 January 2012 Presentation to: STEP New York By: Mark Summers of Speechly Bircham

Pre-nuptial agreement

• Radmacher decision

• Highly persuasive if properly prepared

• Proper disclosure

• 21 days before marriage

• Separate legal advice for each party

• Fair and reasonable terms

Page 15: A case study in cross border estate planning: the US, the UK and India 19 January 2012 Presentation to: STEP New York By: Mark Summers of Speechly Bircham

Rahul’s proposed Indian investments

• Preliminary questions

– is the client an NRI or a PIO?

– what is the nature of the investment?

• NRI is a person living outside India who is an Indian citizen or a PIO

• PIO is a foreign citizen who held an Indian passport or if he or either of his parents, grandparents or great grandparents was born in undivided India

• NRIs and PIOs are entitled to special concessions

Page 16: A case study in cross border estate planning: the US, the UK and India 19 January 2012 Presentation to: STEP New York By: Mark Summers of Speechly Bircham

Routes available for Indian investment

Investment Route/Structure

Running a portfolio of Indian securities

Foreign Institutional Investor route (nb. introduction of new route for “Qualified Foreign

Investors” from 15.1.12)

Acquiring substantial shareholdings in quoted Indian

companiesDeals with Indian promoters

Investing in unquoted Indian companies

Foreign Direct Investment route

Investing in commercial and residential Indian real estate

Joint venture with Indian developer or a real estate fund

Page 17: A case study in cross border estate planning: the US, the UK and India 19 January 2012 Presentation to: STEP New York By: Mark Summers of Speechly Bircham

Foreign Direct Investment route

• Acquisitions of shares in unquoted Indian companies

• Advantageous to channel investment through an entity resident in a favourable double tax treaty jurisdiction

Page 18: A case study in cross border estate planning: the US, the UK and India 19 January 2012 Presentation to: STEP New York By: Mark Summers of Speechly Bircham

InvestorsDirect Investment

Mauritius Fund

Investments in India

Investment Advisor (India)

Brokers (India)

Custodian(India)

Investment Manager (Cayman/Bermuda/

Channel Islands/Switzerland)

Foreign Direct Investment route (cont’d)

Page 19: A case study in cross border estate planning: the US, the UK and India 19 January 2012 Presentation to: STEP New York By: Mark Summers of Speechly Bircham

Investment into Indian real estate

• No restrictions on NRIs

• Foreign direct investment only permitted by foreign investor if project involves element of social development

• ‘Back door into Indian real estate’

– Indian developer establishes SPV

– NRI or foreign investor injects capital into the SPV

– joint venture vehicle

– when development is completed, the SPV is sold and the sale proceeds distributed to NRI or foreign investor as dividend

• Real estate funds attractive for larger investments or group of investors

Page 20: A case study in cross border estate planning: the US, the UK and India 19 January 2012 Presentation to: STEP New York By: Mark Summers of Speechly Bircham

Investors

Cayman/Bermuda/Channel Islands LLP

SPV – Holding Co(Singapore)

Management Company

(Singapore)

Investment Advisor(India or elsewhere)

India Subsidiary(Real Estate Company)

Real Estate in India

Investment into Indian real estate (cont’d)

Page 21: A case study in cross border estate planning: the US, the UK and India 19 January 2012 Presentation to: STEP New York By: Mark Summers of Speechly Bircham

Overhaul of the Indian Taxes Code

• To take effect from 1 April 2012 but expected to be delayed – need to watch this space!

• Introduction of GAAR provisions

– misuse/abuse of Indian tax provisions

– no bona fide commercial reason for the structuring

– rights and obligations are not at arm’s length

– invoked by Central Board of Taxes if a certain minimum level of Indian tax is lost

– significant impact on planning based on the Mauritius/India Double Tax Treaty predicted

– important to review existing structuring

– Intended to stop treaty shopping

Page 22: A case study in cross border estate planning: the US, the UK and India 19 January 2012 Presentation to: STEP New York By: Mark Summers of Speechly Bircham

Overhaul of the Indian Taxes Code (cont’d)

• Residency test for foreign incorporated companies– concept of “place of effective management”

• Removal of distinction between short term and long term gains– assets held for >1 year from end of financial year in which it is acquired– assets held for <1 year from the end of financial year in which it is

acquired– no favourable treatment of gains arising on the disposal of listed

equities or mutual funds

Page 23: A case study in cross border estate planning: the US, the UK and India 19 January 2012 Presentation to: STEP New York By: Mark Summers of Speechly Bircham

Overhaul of the Indian Taxes Code (cont’d)

• Introduction of CFC provisions– anti-avoidance measure– “passive income” earned but not distributed by a foreign company– foreign company “controlled directly or indirectly” by a resident in India– income deemed to be dividend distribution and taxable in hands of

Indian resident shareholders– impact on outbound investment structures

Page 24: A case study in cross border estate planning: the US, the UK and India 19 January 2012 Presentation to: STEP New York By: Mark Summers of Speechly Bircham

Click to edit Master title style

• Click to edit Master text styles– Second level

• Third level• Fourth level

» Fifth level

24

•Construction & Engineering

•1 November 2006Further Information

For more in formation on our services,

please contact:

Mark Summers

[email protected]

Tel: +41 (0)43 430 0240

Sanjvee Shah

[email protected]

Tel: + 44 (0)20 7427 6785

www.speechlys.com