When investing in real estate, the tax aspects are often a crucial element to be considered. A classic way to invest in real estate in a tax efficient way is the split-purchase preceded by donation. However, the tax administration has changed its position on the tax treatment of this type of sale four times over the past two years. Hereafter, we present the administration’s current position.
As already stated, the split-purchase of a property is a classic element in family estate planning. A typical example of such a split-purchase is that of parents buying a house with their children. The parents acquire the usufruct on the house and the children the so-called “bare” ownership thereof. In advance, the parents donate the necessary funds for the purchase of the bare ownership to the children. When the parents pass away, the usufruct ends and the bare owners, the children, automatically get full ownership of the house.
This technique was very attractive since no inheritance tax was levied on such a transaction. However, with the introduction of the anti-abuse provision, on 19 July 2012, the split-purchase was blacklisted as one of the transactions that are, in principle, seen as tax abuse. However, since then, the tax administration has changed its position twice. First, the split-purchase was removed from the black list on 10 April 2013, and by decision of 19 April 2013, the administration made it known that it considered the transaction as a violation of article 9 of the Inheritance Tax Code. The administration thus decided that a progressive inheritance tax was due on the value of the whole property.
After widespread criticism of that new position, the tax administration changed its view once more by decision of 18 July 2013. With this decision, the administration confirmed that it sees this transaction as a violation of article 9 of the Inheritance Tax Code. What is new, however, is that such transactions are, since1 September 2013, acceptable in the following circumstances:
1. when the preceding donation (from the parents to the children) was subject to registration duties for donations; or
2. when the beneficiaries of the donation (the children), have been able to freely use the donated funds.
How one has to prove that the beneficiary was able to freely use the donated funds, is not fully clear. The administration has already indicated that this will be the case if it is proven that the donation by the beneficiary of the usufruct was not specifically destined to be used as financing for the purchase of the bare ownership in the context of the split-purchase.
Unfortunately, with the decision of 18 July 2013, there is only partial clarity. As far as a transaction falls under the scope of the two exceptions, it is possible to use the technique of the split-purchase to avoid inheritance tax. However, it remains to be seen how the two exceptions will be interpreted in practice. Only in the future will it become fully clear how safe this technique still is.
