- It should be for the benefit of the family. ‘Family’ here has a broader meaning than lineal ascendant, descendants or blood relatives. It could include extended families like cousins.
- It should be transparent and framed with the right intention and should not be driven by any fraud or coercion.
- It should be for the settlement of present or future disputes by equitable distribution of family property amongst various families/ members.
- There should be the existence of antecedent title (pre-existing rights) in the property.
- It should be meant for the preservation of family property, peace and reputation of the family.
- It is being executed to resolve a dispute or to avoid a potential dispute.
A family settlement would generally lead to exchange of assets amongst the family members and one of the main issues under evaluation would be the income tax implications. Since there are no specific provisions under the taxation laws, the taxability of assets transfer under the family settlement has been a matter of dispute.
The courts or tribunals have in the past ruled that the exchange of assets amongst family members under a family settlement would not trigger a capital gain tax because transfer or exchange of properties are happening due to pre-existing rights of family members and hence it is not akin to ‘transfer’ of a capital asset.
Case-specific
The taxability of such transfer of assets has to be determined based on the facts of each case and transfer of assets under the garb of family settlement would not get immunity from the tax and courts have ruled that in these situations, exchange of assets is subject to capital gains.
It has also been noted that the family assets are sometimes owned or held in corporate entities and transfer of the assets by these corporate entities to family members may not get immunity from capital gain tax. The settlement of these assets needs to be structured to achieve tax efficiency.
Big business houses and conglomerates have adopted family settlements to preserve the dignity and honour of the family. At times, improper planning, cross transfers from corporate entities to family members or lack of robust implementation/ documentation can hit them hard when challenged in the courts.
Since prevention is better than cure,a few large families and big business houses have started adopting succession planning for their family and business assets and at times careful demarcation of assets is made amongst siblings to avoid future disputes.
Some families have created family charters which, though not a legally binding document, set guidelines for the families to resolving conflicts in an amicable way.
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