Offshore investments in insurance, real estate
With the objective of long-term sustenance of wealth created both inside as well as outside India and continuous revenue generation, high net-worth individuals (HNIs) in India have decrypted and adopted innovative methods for asset protection and estate planning. The latest addition to the existing gamut of methods are offshore investments in jumbo life insurance policies (JLIP) and real estate.
JLIP
In modern times, estate planning has ceased to be a modest segregation of assets and has evolved as one of the methods for wealth generation. It is in this light that JLIPs have become increasingly popular. JLIP is a policy with an exceptionally high face value, almost always in millions of dollars and is typically guaranteed and underwritten by more than one insurance company.
The premium towards a JLIP is generally financed by availing a loan from a third party bank and providing such collaterals as may be necessary. JLIPs cater to an array of needs ranging from protection of successive generations, assuring liquidity at death of the insured, prevention of wealth erosion to distribution of wealth among chosen beneficiaries. However, legislative hurdles often hinder the seamless acquisition of JLIPs. As per the foreign exchange management act, 1999 (Fema), the primary legislation regulating exchange control in India, an Indian resident cannot hold a general insurance policy issued by an insurer outside India without prior approval from the Reserve Bank of India. Additionally, complexities arise on whether a policy can be purchased pursuant to a capital remittance under the liberalised remittance scheme (LRS).
Moreover, the insurance sector in India is highly regulated. The Insurance Act, 1938 prohibits any person, except an Indian insurance company, from carrying out the business of insurance in India, after the commencement of the Insurance Regulatory and Development Authority of India Act, 1999. Thus, a foreign insurance company needs to be wary of the regulatory framework while issuing a policy financed by an Indian resident. Various Indian persons have been beneficiaries to such policy, especially in situations where the person financing the policy is a non-resident or the financing is done from capital earned while being a non-resident.
Offshore real estate
The real estate sector is booming, both in terms of avenues available for investment and the magnitude of returns one could reap from such investment. These factors coupled with legislative relaxations have fuelled the popularity of investments in this sector. It is now possible for a resident individual to acquire offshore real estate under the LRS by remitting up to $250,000 per financial year.
For the purpose of investment in offshore real estate, the consequences of inheritance tax, stamp duty and capital gains tax implications in the jurisdiction, where the real estate is situated, should be taken into account. Careful structuring is typically required in case the acquisition of real estate is leveraged. In this regard, it is important to note that under the Fema, an Indian resident individual cannot take a loan from outside India. While offshore investments offer mammoth opportunities and lucrative returns, they however saddle the investor with the responsibility of compliance with myriad laws across jurisdictions. Thus, it is essential that prior to making offshore investment, HNIs familiarise themselves with the legal complexities involved and obtain proper legal advice.
