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 AG and Sanjvee Shah of Speechly Bircham LLP

2. 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

3. 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%

4. 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)

5. 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

6. 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

7. 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

8. 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?

9. 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

10. Tax status Anna –foreign domiciled, UK resident –remittance basis of taxation –£30,000 annual charge from 8 th 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

11. 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

12. 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

13. Offshore trusts (cont’d) Wealth protection –terms of trust –governing law –letter of wishes –one or more trusts –protecting the “crown jewels” –nuptial settlement

14. 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

15. 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

16. Routes available for Indian investment InvestmentRoute/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 companies Deals 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

17. 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

18. Investors Direct 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)

19. 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

20. 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)

21. 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

22. 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

23. 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

24. 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 2006 Further Information For more in formation on our services, please contact: Mark Summers mark.summers@speechlys.com Tel: +41 (0)43 430 0240 Sanjvee Shah sanjvee.shah@speechlys.com Tel: + 44 (0)20 7427 6785 www.speechlys.com