The split purchase of a property is a popular estate planning technique, but it comes with some risks. It is so popular that the taxman is watching them carefully
What is the problem?
The split purchase of a house or apartment is the purchase by one person of the bare ownership and the purchase by another of the usufruct of a property. Examples are :
- the parents buy an apartment as a second residence ; they buy the usufruct and the children buy the bare ownership.
- the parents want to invest their savings and buy a property with several apartments, the children buy the bare ownership and the parents buy the usufruit.
- When the children have left the nest, parents may want to downsize, sell their maison de maître in Schaerbeek to buy a comfortable apartment with a lift. The capital gain is not liable to tax and the parents gift the children the cash to buy the bare ownership and the parents buy the usufruit.
- The split purchase can also be applied to the relationship between grandparents and grandchildren or between childless uncles/aunts and nephews/nieces.
As they have the usufruit, the parents have the right to use the property for the rest of their lives. They can live in the property or collect the rent. The usufruit extinguishes upon the death of the parents and, as a result, the children who had bought the bare ownership become full owners. In other words, upon the death of both parents, the children automatically acquire full ownership of the property instead of inheriting it, and they do not, in principle, pay inheritance tax.
In principle … because the Belgian tax authorities could claim inheritance tax on the full value of the property in the estate of the parents.
Without adequate preparation,
you risk paying inheritance tax on the full value of the property
To avoid inheritance tax avoidance, the inheritance tax code has introduced some “tax fictions”. One of them is that anything that the deceased owned in the last three years of his life (five years if the deceased was living in Wallonia) is deemed to be still in his estate. Another tax fiction is that if the deceased has usufruit on a property, that property will be deemed to be part of his estate that is inherited by the children who had acquired the bare ownership.
In other words, the tax administration presumes that the parents have financed the usufruct and bare ownership as a favour to the children so that the children do not acquire the property without paying inheritance tax.
This presumption can be rebutted.
To get around this presumption in the law, the children can prove that there was no “disguised gift” at the time of the split purchase. In other words: either there was no gift (the children had the money) or the gift was not a disguised gift, but an actual gift.
In essence, the bare owners, the children can provide proof to the contrary if they can show that they actually paid the price of the bare ownership. In practice the bare owners, the children, must prove that they were in a position to finance the bare ownership by their own means, taking into account three elements:
- The total price was correctly allocated taking into account the value of the usufruct and the bare ownership.
- They had sufficient resources to acquire the bare ownership.
- They actually paid the price themselves.
How do you prove this?
This is where the problem lies… You have to refer to the administrative positions which vary over time and from one region to another.
In the Brussels Region and in Wallonia, the current position (S 9/06-07) is that the bare owners must demonstrate that at the time of purchase they had sufficient personal means to acquire the bare ownership and that they actually paid for it. If the funds have been gifted to the bare owner, this gift does not necessarily have to be made in a notarised deed. It is sufficient to prove that the funds were given (by bank gift or by notarised deed) before the bare owner paid his share of the price.
Please note that if any amount (a deposit, a guarantee, etc.) is paid to the vendor at the time of signing the preliminary sales agreement, the “compromis de vente”, and that is generally the case, the tax authorities take the position that the funds must have been given before the compromis is signed. If, on the other hand, the price is actually paid in full at the time of signing the purchase deed, it is sufficient that the donation is made before this deed.
Inheritance tax rules were regionalised in 2015. Since then, Flanders has published its own position n° SP 20067: as soon as the bare owner can show that he definitively held the funds following a gift, and that he actually paid his share of the purchase price with these, the presumption has been rebutted, provided that the donation was made prior to payment of the purchase price. However, Vlabel (the Flemish Tax Department) does not require that the funds must be gifted before a deposit is paid when the compromis is signed.
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