Typically, the split-purchase technique between usufruct (for the parents) and bare ownership (for the children) is one of the key tools of intelligent estate planning. But it can also be used for a corporate purchase. We explain everything.
Sometimes in the crosshairs of the tax authorities but never questioned over the years, the technique known as split-purchase allows the real estate investor to make substantial savings, whether it is at the time of the transmission of an estate from one generation to the next within the framework of a well thought-out estate planning, or via a management company for its administrator.
What is a split purchase?
The split-purchase, at the time of an acquisition, consists in distinguishing the usufruct (the enjoyment of the property) from the bare ownership (the property without its enjoyment).
- The usufructuary has the right to occupy the property or to receive the rents if he does not occupy it. As such, he will pay the real estate withholding tax, for example, but will obviously not be able to resell the property on his own since he is not the full owner.
- The bare owner has the assurance of becoming the full and automatic owner of the property upon the death of the usufructuary. He will then be able to enjoy it as he pleases and this... without paying inheritance tax since the property will, by definition, have been removed from the inheritance base.
What is the purpose of a split purchase?
This is one of the best tools available to estate planners: as the amounts used for the purchase must be taken from the account of each party in order to be valid (note: since August 1, 2020, the money must be in the account before the signing of the sales agreement in Brussels and Wallonia), it is generally preceded by a donation in due form of money from the parents to the children.
This donation therefore allows:
- To the children to finance the purchase of the bare ownership (which constitutes the major part of the purchase price given the age differential between parents and children). It constitutes a sort of advance on inheritance which will be tax-free at the parents' death.
- It is a way for the parents to obtain the assurance that this money, even if it is definitively given, is well invested and that they will be able to reap the fruits of it until the death of the last survivor (if it is a married couple) without having to account to anyone.
Under what conditions?
In order for this operation not to be questioned by the tax authorities at the time of the inheritance (and to avoid that inheritance taxes are still due because of a condition not respected), it is imperative that:
- The children can prove that they themselves paid their share (the bare ownership) at the time of the purchase and that this money comes from one of their accounts.
- That if these financial means come from a donation prior to the purchase, that this donation has a certain date
It is of course also possible for the children to finance their share without a donation if they have the means or if they take out a loan which they repay themselves.
How to proceed with the donation?
- Either a donation before a notary. In direct line, the donation duties to be paid at this time will be 3% in Brussels and 3.3% in the Walloon Region. These rates are much lower than the inheritance taxes in force in these two Regions and fully justify the use of a notarized donation.
- Or a simple bank donation under private signature (not registered) with the risk that if the donor dies within 3 years after the donation, the amount donated will be added to the donor's estate with payment of inheritance tax.
Price of the usufruct
The value of the usufruct (and therefore of the bare ownership) is calculated on the basis of statistical mortality tables according to the age and sex of the usufructuary(ies). The older the usufructuary(ies) will be at the time of the purchase, the lower the price will be since, statistically, they should benefit from it for less time.
The purchase in company
The split purchase is not reserved for members of the same family. It is also commonly carried out between a company (management) and its director because it can bring substantial advantages on the tax level.
- The company buys the usufruct (for a period generally of 20 to 25 years, representing a value of about 65% of the full ownership)
- The director buys the bare ownership (for the remaining 35% in this case)
The operation, allows the company:
- To invest the amount of the purchase by cashing the gross rents and thus benefiting from an interesting return on investment during the whole period of the usufruct while taking into account the fact that after the duration of the usufruct, it will not have any more real right on the good. At the end of the term, the rents must not only have reimbursed the purchase price, but must also have provided at least an annual market return for the type of property desired.
- To deduct all the expenses related to the property and its rental, including a depreciation of this investment over the period of ownership
The company thus obtains a return generally higher than the market return and, at the end of the usufruct period, the director becomes the full owner of the property without any costs related to the exit of the property from the company.
Other case of a company
Finally, it is possible to reserve 1% of the full ownership to a (management) company or to each child when the parents do not have the necessary liquidity for a donation that would allow the classic case developed above.
When the parents become older, with the money received or their own savings accumulated in the meantime, it will be possible for the children to buy back the remaining 99% at the reduced registration rate of 1% (in Wallonia and Brussels) or 2,5% (in Flanders) in order to get out of the indivision.
Also, if one day perhaps a taxation on the real rents (and not on a fixed basis as it is the case today) came to burden the profitability of the investment in natural person, a repurchase of the full ownership of the property by the company would make it possible to shelter the taxation of its rental incomes with the company tax (generally weaker than the progressive tax on the incomes of the physical persons).
Finally, if the property is 100% owned by the management company of the parents, for example, a donation of the shares of the said company (donation of movable property) could be made to the children.