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Split purchase is an estate planning technique which involves splitting the acquisition of i) the ‘usufruct’ (for example, purchased by the parents) and ii) the ‘bare’ ownership (purchased by the children) of a new building, in order to anticipate the related inheritance tax.

Split purchase and inheritance tax

Once both parents have passed away, the extinction of their usufruct right enables the bare owners to obtain full ownership. If this mechanism is tested under civil law, it is vital that things be set up correctly from a tax standpoint. The Inheritance Tax Code (Article 9 Inher. Tax Code for the Walloon Region and the Brussels-Capital Region and Article 2.7.1.0.7 of the Flemish Tax Code) contains a tax “fiction” that considers that the usufructuary was still the full owner of the real estate assets concerned at the time of their death. In effect,  this transaction is considered by the Inheritance Tax Code as a “concealed gift”, which gives rise to the application of inheritance tax upon the usufructuary’s death  for the full ownership of the property concerned.

How can you avoid the split purchase tax trap?

The bare owner can avoid the application of this inheritance “fiction” by providing proof that the funds used to finance the purchase of the bare ownership indeed originated from an account opened in their name.

In practice, the usufructuary makes a prior gift (“donation”) of sufficient funds to the bare owner to finance their portion of the purchase price. This gift, whether or not it is registered, makes it possible to avoid this “fiction” being applied, and the risk of having to pay inheritance tax on the full ownership after the usufructuary’s death.

At which point should the gift prior to the purchase of real estate be made?

Under the terms of a new administrative decision of 26 June 2020, the federal authorities have just clarified the practical steps to be taken regarding this prior gift. This new decision applies to all split purchases as of 01/08/2020:  the authorities now require the bare owner to have the necessary funds to finance the purchase of the bare ownership, prior to signing the sales agreement, provided that a deposit or guarantee is paid at that time (even when these amounts are entirely attributable to the usufructuary portion in the sale price). Even if this new decision by the federal authorities is only binding on the Walloon Region and the Brussels-Capital Region, prudence dictates that we also take it into account in the Flemish Region.

In conclusion:  the application of inheritance taxes on the full ownership of a real estate asset after the usufructuary’s death, and which the parties have come to own through the split purchase mechanism,  may be discarded when the bare owner can provide evidence that they had sufficient funds prior to the payment of a deposit or guarantee. This means that the prior gift of funds, regardless of whether or not it is registered, must be made before the sales agreement is signed.

Situation as at 31/07/2020

Our experts are at your side.
Draw on the expertise of our estate planning specialists

Bernard Goffaux
Head of Estate Planning
Christophe Delanghe
Senior Estate Planner

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