Parents buy the usufruct and children the bare ownership. Upon the death of the parents, the children become full owners and pay no inheritance tax. However, there are a few things to look out for in order to avoid unpleasant surprises.
Say, Armand bought a seaside apartment with his only daughter Joëlle. He has the usufruct, she has the bare ownership. When Armand dies, his usufruct extinguishes and Joëlle's bare ownership passes into full ownership.
In our example, Joëlle is promoted to full owner without any inheritance tax. There is a 'but' attached to that. Article 22.214.171.124.7 VCF (Flemish Tax Code) is based on the presumption that father Armand did pay everything when he bought the apartment, i.e. both his part (usufruct) and the part of Joëlle (bare ownership).
If that is indeed the case, then Joëlle has in fact received a gift that remained secret from the outside world. The law speaks of 'covert advantage'. The consequences for inheritance tax in that case are that people pretend that the apartment actually belonged entirely to father Armand. Joëlle will therefore have to pay inheritance tax on the full value of the seaside apartment. Which, of course, was not the initial intention. However, she can avoid this by providing proof to the contrary.
Proof to the contrary by the bare owner
Joëlle from our example must demonstrate three things in a split purchase:
1. That the pricing for the usufruct part (to be paid by father Armand) and the bare ownership part (to be paid by Joëlle) has been done correctly.
Tip: Have the annual rental income from the property estimated by an expert and discount this income over the life expectancy of the usufructuary(s).
2. That she had the necessary personal funds to purchase the bare ownership of the apartment.
It's important that she had that money before the purchase. The way the money enters the bare owner's assets is of no importance. The tax authorities have accepted for years that this may be donated by the testator on condition that this donation precedes the purchase.
If in our example Joëlle can prove that father Armand gave her the money by bank donation a week before the purchase so that she could pay her share, and she actually paid her share, then she avoids the inheritance tax on the death of her father. Unless her father died within three years of the donation, but that's another matter.
Although this procedure was called into question by the tax authorities at a certain point in time, it may be assumed today that such a prior donation may serve as proof to the contrary if no gift tax has been paid on it.
3. That she actually paid her share of the price (for the purchase of the bare ownership). It is this last point that we will now discuss in more detail.
As a bare owner, how do you prove that you paid?
Sometimes this is a sticky point! If you make a split purchase, you must realise that one time you will be asked to provide proof to the contrary, i.e. if the parent who buys the usufruct dies. It is quite possible that decades have passed since the purchase and the death, so that the bank is no longer able to provide you with the necessary documents to prove that you paid your share. Banking information is only kept for a limited period of time.
Tip: Keep the bank statements and other documents proving that you paid with your own funds. Print them out and keep them in a safe place.Or store them in the cloud.
As a taxpayer, you must prove that you have paid. This can be done by proving that you paid by bank cheque, for example (judgment of the Court of First Instance in Ghent of 20 February 2020).
However, the case law is strict. For example, the fact that the deed of purchase states that you paid your share with your own funds is not sufficient for the tax authorities. You have to prove that payment was actually made. The fact that the bank can no longer deliver documents after several years does not remove this burden of proof and is therefore not a valid excuse (judgment of the Court of Appeal in Ghent of 4 February 2020). However, the money laundering legislation has made it obligatory to specify in the deed where the payment came from. This specification can help you on your way to provide proof.
Ask for advice and follow the rules
A split purchase is definitely worth considering. But in order to avoid unpleasant surprises, it is best to seek advice in advance and make sure that everything is well prepared and carried out correctly.
It is of the utmost importance that the bare owner carefully keeps his documents, which include:
- The calculations of the expected revenues and returns of the property;
- Where available, forecasts of the life expectancy of the usufructuary;
- The availability of the necessary funds at the time of purchase;
- Proof of actual payment.
Are you considering such a split purchase and do you still have questions? Contact us. We will be happy to help you.