Sukesh, his two brothers and a sister are wrangling over a flat, an office and some inherited jewellery. They settled an agreement that the oldest brother gets the flat, the sister will get the jewellery and the office property goes to the remaining two. This kind of instrument is neither a gift nor a transfer as per the Income Tax laws. They drafted separate transfer of property documents and the family settlement agreement so as to bring about an actual transfer. A sale deed will attract capital gains tax but here the parties to a family settlement are not subject to capital gains tax in respect of the profits derived from their share of the property.
A family arrangement is an accord where family members commonly work out how a property should get distributed amid themselves. They are related to each other and have a claim to a divide over the undecided property. It may not be limited to real estate, but may include movable assets, shares, LIC policies, jewellery bank accounts and lockers etc. It is typically used to settle common property that the family members own jointly only. Those who wish to avoid prolonged, public and confused court battles will find that family settlements are a faster and most pleasant way to resolve disputes.
Halsbury's Laws of England a uniquely comprehensive encyclopedia of law provides the only complete narrative statement of law in England and Wales. Its Volume 18, Fourth Edition, deals with this subject at length vides para 301 which define a family arrangement as follows:-
“A family arrangement is an agreement between members of the same family, intended to be generally and reasonably for the benefit of the family either by compromising doubtful or disputed right or by preserving the family property or the peace and security of the family by avoiding litigation or by saving its honour”.
“The agreement may be implied from a long course of dealing, but it is more usual to embody or to effectuate the agreement in a deed to which the term family agreement is applied”.
This is a process where usually a lawyer / tax consultant or a senior family member, helps the family disembark at a reciprocally acceptable resolution to the property in dispute. It may contain a series of papers narrating out the property rights of each family member.
There are only little legal formalities that need be completed to ensure that the agreement so made is legal, signed by all the family members involved, attested by two witnesses to make it a strong case and is then registered. A stamp duty as per the respective state law is normally applicable on such deeds depending on the value of the property involved. A duly executed family settlement cannot be revoked, except with a court decree though it can be challenged in a court of law.
Thus, a faultless family settlement or a memorandum of understanding will result in a perfect, harmonious and obligatory settlement, which benefits everybody in terms of saving precious time and money which is spent in courts and advocates' fee.
The courts have taken a very liberal and broad view of the validity of the family settlement and have always tried to uphold it and maintain it. As per a case decided by the Apex court “Courts give effect to a family arrangement upon the broad and general ground that its object is to settle existing or future disputes regarding property amongst members of a family. The consideration for such a settlement will result in establishing or ensuring amity and goodwill amongst persons bearing relationship with one another.”
This arrangement is a peace-making and a pacific mean of division of property and if by due consent of parties, the matter has been settled, it should not be allowed to be reopened by the parties to the agreement on unsustainable argument.
Since adopting this mode of operation for legal avoiding capital gains tax and stamp duties, family arrangements are seen with a level of mistrust by the Income-tax Department and other Government authorities; it is therefore extremely essential to strengthen the documentation of family arrangement with immense care, in absence of which the litigation within the family may be extended to various other revenue departments.