Lloyd Georgelaan 11 I 1000 Brussels www.berquinnotarissen.be
Contents 1. Declaration of estate: significant changes in Flanders 2. ‘Misery tax’ reduced once again in cases of relational break-up? 3. Valuation of usufruct: at long last a (limited civil law) statutory system
1.Declaration of estate: significant changes in Flanders
Eric Spruyt, notary-partner Berquin Notarissen cvba, Professor at KU Leuven and Fiscale Hogeschool (Tax College)
April 2015
Since 1 January 2015, the Flemish Region has been collecting its own succession duties which, incidentally, now go by the name of “inheritance tax”. This name change is only a minor detail as also the rules of play, which can be found in a new codex, have changed. The most noteworthy of these undoubtedly relate to the formalities governing the declaration of estate and to the fact that fines have gone up dramatically!
A new "coat" and name
For quite some time now, the Regions in our country have enjoyed competence in matters of succession duties. They can set their own rules of play, rates, reductions and exemptions. Collection however - in official tax jargon known as the tax "administration" - has up and until now been ensured by the Federal Government (FPS Finance). Every Region is free to decide when it wishes to organise and manage its own collection. The Flemish Region decided it would do so as of 1 January 2015. Collection will henceforth be ensured by VLABEL (Flemish Tax Administration). The authorities took this opportunity to incorporate the Flemish succession duties into the existing Vlaamse Codex Fiscaliteit (Flemish Tax Code). This Code contains nearly all the regional taxes within Flander's remit, such as property tax, car registration tax, various vacancy charges, etc. and, as of late, succession duties too. The latter were also given a new name and, in line with the term used in the Netherlands, were rechristened to "inheritance tax". The rates, exemptions (a. o. the Flemish exemption on the family home inherited by the surviving partner) and reductions remained untouched. In other areas, citizens are faced with a number of drastic changes.
Declaration of estate
As in the past, Flemish inheritance tax is calculated on the basis of a declaration of estate which heirs must compile and (timely) file themselves. New in Flanders is the mandatory requirement to use a standard form. In contrast to what was formerly the case, citizens must now complete a form, featuring numerous pre-printed sections and boxes. In other words, the new declaration of estate has been given more of a personal income tax return look. The standard form in the Dutch version can be downloaded from the VLABEL website, under the section "formulieren" (forms) (in the top right-hand corner) - erfbelasting (inheritance tax) (http://belastingen.vlaanderen.be). An exception applies to declarants residing in one of the so-called municipalities with (linguistic) facilities who can apply for and file a form printed in the French language. By way of transitional measure, VLABEL will continue to accept the former (federal) forms until 31 March 2015.
Declarations of estate are no longer filed with the regionally competent collector of succession duties in function of the deceased's former place of residence but with one central office, i.e. VLABEL. The declaration can be submitted via the link on the website, by e-mail or by ordinary post to: Vlaamse Belastingdienst, Erfbelasting, Vaartstraat, 16 in 9300 Aalst.
Tax increase for late submissions... even if you were granted an extension!
The time limit to file a declaration of estate has remained unchanged. It is still, as of the date of death: 4 months if the death occurred in Belgium, 5 months if the death occurred in a country within the European Economic Area (EEA, i.e. the 28 Member States of the European Union, plus Iceland, Liechtenstein and Norway) and 6 months if the deceased passed away outside of the EEA.
At that, nothing was changed either to the possibility of applying for an extension of the submission deadline - e.g. in complex inheritance situations or in the event of problems locating assets or heirs. In the case of a simple (read: unsubstantiated) request for an extension - which must be applied for to VLABEL – in principle a 2-month extension will be granted. Requests for a longer extension will need to be substantiated and are not granted automatically.
In the past, late submissions were only subject to a limited fine, i.e. EUR 25 per month of delay and per heir. At that, the fine was not imposed if the declaration, once an extension of the submission deadline had been granted, was filed within the extended time limit. The payment term did continue to run however. Once the due date had expired, moratorial interests of 7% applied. But the accrual of interest could be halted by lodging an advance into the account of the succession duties collector. Thus, succession duties were estimated as best as possible and paid into the taxman's account prior to the expiry of the payment deadline and well before the taxman sent out a request for payment.
In this respect, the rules of play have been overhauled completely and the fines, currently in the form of tax hikes, have increased dramatically. So, citizens beware! Anyone who does not complete (and file) his/her own declaration but gets a professional (e.g. notary, tax consultant, etc.) to organise this on his or her behalf would be well advised to contact that person immediately after the death to ensure that the file is started up as soon as possible. In view of the serious financial implications, a timely submission has become more desirable than ever.
For, what has changed? Three important issues: 1) the fine for late submissions has increased significantly, 2) a fine will now also be incurred (albeit at a lower than the normal rate) if the declaration is submitted by the extended deadline 3) fines can no longer be avoided by paying an advance.
Late submissions are subject to a tax increase based on the following scale: - Declarations filed within 5 months of the statutory submission deadline having expired: 5% - 10%, 15%, 20% if the declaration is filed during the 6th to the 11th, the 12th to the 17th month and after the 18th month of the statutory submission deadline having expired respectively. Even if VLABEL has granted an extension to the submission deadline and the declaration is filed by the extended deadline, a tax increase will still apply, albeit at slightly lower percentages, i.e. - in function of the aforementioned deadlines - 1%, 5%, 7.5% and 10% respectively. Mind, if also the extended submission deadline is not adhered to, the same (higher) tax increases will apply as if no extension had been granted (i.e. 5%, 10%, 15% or 20%).
So, it is worth remembering that there will be no escape from these tax increases for late submissions discussed above by paying an advance/making a prepayment on the inheritance tax.
Abolition of the ex-ante estimate
In their declaration, heirs must value the assets at their market value. That can be easier said than done at times. In the past and where desired, the process of an ex-ante estimate, which the Inheritance Tax Code regulated in detail, could be availed of. This entailed that citizen and taxman appointed an expert by joint agreement who would compile an evaluation report that was binding on both parties. This could prove to be extremely beneficial. If an expert valued a property at 250,000 euro for instance, that valuation used to be retained in the declaration of estate. If the heirs subsequently managed to sell the property at a higher price (e.g. 300.000 euro), there was no additional inheritance tax due on the added value (in casu 50.000 euro). In the absence of any such ex-ante estimate and if the property was sold within two years, the taxman could collect additional inheritance tax on the difference however.
Quality charter with experts. Well, the option of an ex-ante estimate no longer features in the Flemish Tax Code. Henceforth, the Flemish Administration will perform its own valuation and retain that as a calculation basis for the inheritance tax. Heirs who do not agree with the taxman's higher valuation can either file an administrative objection procedure or go to court. Under this new system, the taxman has become judge and interested party, a change criticised in professional circles. To address that and to enhance legal certainty for citizens to some extent, VLABEL has come up with the idea of drafting a charter for surveyors which the latter can subscribe to. Citizens who contract a surveyor, signatory to the charter, to value a property for inheritance tax purposes can henceforth assume that VLABEL will in principle not challenge the valuation of the property. The charter in question sets out the criteria any qualitative valuation must meet. These criteria include those relating to the professional competence of estimators and to the actual content of the valuation report itself. The list of experts who signed the quality charter will also be published so that citizens can establish at all times which experts the authorities deem to be a qualitative partner.
Note however that the expert’s valuation is not 100% binding on the taxman but will merely be considered to be correct “in principle”. In other words, the valuation will only be presumed to be qualitatively correct. It must also be borne in mind that this system only applies to immovable assets, not to movable assets.
Tolerance for sales within 2 years. It is furthermore worth knowing that, in this context, VLABEL will practise tolerance based on the administrative practice that already prevailed in many parts of the country. If a property listed in the declaration of estate is sold within two years of the death, no tax increase will apply if an additional declaration for the difference between the sales price and the original valuation is filed spontaneously.
Flat-rate costs
But it is not all doom and gloom! In the declaration of estate, heirs no longer only have to list the assets (property, financial assets, car, etc.) at their market value but can now also deduct liabilities, i.e. debts. In the past (and in the Brussels-Capital Region and the Walloon Region also after 1 January 2015), the reality of these debts always had to be substantiated with the necessary documentary evidence (expense statements, invoices, creditors' statements, etc.). Under Flemish inheritance tax law, heirs can now opt for a flat rate. Ordinary debts, such as the so-called “final illness costs” (hospital and doctor's bills for instance) and domestic debts that remained unsettled on the date of death (electricity, water, telephone, Internet, etc.), can now be assessed at a fixed amount of 1,500 euro. Liabilities incurred to acquire or retain property (e.g., the balance on a mortgage for the purchase or renovation of a dwelling for instance) do not come under this fixed amount. The reality of this type of real estate liabilities still needs to be substantiated with documentary evidence. Funeral costs can be assessed at a fixed amount of 6,000 euro. Both fixed amounts will be corrected on the basis of the index of consumer prices on 1 January of each year.
These fixed amounts will be applied automatically unless the heir indicates in his declaration of estate that he wishes to opt for a deduction of the actual liabilities and/or actual funeral costs. In that case, he will need - as was the case in the past - to enclose the relevant documents in support. But here too, citizens are being facilitated. Henceforth, they can simply submit a copy of these documents as an original is no longer required. In the event of doubt, VLABEL can always look for the original of course.
At that, heirs can also opt for a combination of the flat rate and the actual liabilities. In other words, declarants no longer have to choose between a flat-rate system and no flat-rate system. They can for instance opt for the fixed amount of 1,500 euro for any unsettled domestic expenses and claim the actual funeral costs (or vice versa).
Payment via notice of assessment
The manner in which Flemish inheritance tax will be collected is also completely new. Henceforth, inheritance tax will be assessed and, as is the case for personal income tax, a notice of assessment will be issued and sent out. For a period of 5 years (9 years in the case of fraud) as of the start of the submission period, i.e., in principle, as of the date of the death, the estate can be subject to an additional assessment. The notice of assessment is issued in the name of the taxpayer but sent to the address of the elected domicile listed on the declaration of estate. Like in the past, domicile can be elected at the address of the deceased, at the address of one of the heirs or at the address of the professional advisor who helped to draw up the declaration (e.g. the notary's office). The inheritance tax liability must be settled within a period of 2 months of the date of dispatch listed on the notice of assessment. Also this payment period is new. Before 1 January 2015, the payment period was linked to the applicable submission period for the declaration (submission period + 2, so people had 6, 7 or 8 months respectively to settle their liability as of the date of the death depending on whether the death occurred in Belgium, outside of Belgium but within the EEA, or outside of the EEA).
Moratorial interests (currently still ad 7%) are due if the heirs fail to pay within two months of the date of dispatch of the notice of assessment. So this too has changed. In the past, these interests accrued automatically as of 6 months (7 or 8 months, depending on the case) of the death. Brussels and Wallonia?
In these Regions, nothing has changed. Also the rates (and reductions or exemptions) remain unchanged here. Collection is still ensured by the Federal Administration and declarations of estate can still be filed with the regional succession duties offices on the old (blank) forms. If the declaration of estate is submitted late, heirs are still only liable for a 25 euro fine per heir and per month of delay. At that, the moratorial interests of 7% for late submissions can still be avoided by timely paying an advance on the inheritance tax owed. Also the ex-ante estimate can still be availed of.
******************** Lloyd Georgelaan 11 I 1000 Brussels www.berquinnotarissen.be
2.‘Misery tax’ reduced once again in cases of relational break-up?
Eric Spruyt, notary-partner Berquin Notarissen cvba, Professor at KU Leuven and Fiscale Hogeschool (Tax College)
April 2015
In Flanders, 2.5% registration duties are due on any property that is divided between joint owners. However, in certain situations, that rate has once again been reduced. When?
Duties on the division of real estate. This is a proportional registration duty of 1% originally that is levied on any property that is located in Belgium and is owned by several people, if that property is (partially) divided between the joint owners (art. 2.10.1.0.1 of the Flemish Tax Code, hereinafter FTC).
How much? As was within its competence, the Flemish Region increased that rate from 1% to 2.5% on 1 August 2012 (Flemish Decree of 13 July 2012; B.S. [Belgian Official Gazette], 23 July 2012). Division of real estate duties are levied on the total market value of the property if, following the division, the indivisum ceases to exist. If undivided shares only are transferred, i.e. if the indivisum continues to exist following the transfer, the duties are calculated on the market value of the parts transferred (art. 2.10.3.0.1, §2 FTC).
Also in the case of 'relational break-up'. Hence the term 'misery tax'. Even in divorce situations for instance where one of the partners buys out the other partner's share in the dwelling they purchased together, he will in fact be liable for 2.5% registration duties on the value of the dwelling. In some cases, he may qualify for an 'allowance', i.e. a reduction of € 50,000 on the amount which the misery tax is calculated on, increased by € 20,000 per dependent child.
What has changed? 2.5% remains the rule. In principle, the 2.5 % division of real estate duties will remain applicable in the Flemish Region even after 1 January 2015 (art. 2.10.4.0.1, first paragraph FTC), at least in situations where the division of the property is not the result of a relational break-up. For instance if A, B and C inherit a property from X, for a 1/3 undivided share each, and subsequently decide to determine the joint ownership, the 2.5% rate will continue to apply.
Rate of 1% in the case of relational break-up. In certain cases, division of real estate duties have been reduced to 1 % as of 1 January 2015. The reduced rate applies if the division is the result of a divorce by mutual consent (DMC) or a divorce on the grounds of 'irretrievable breakdown' or so-called ‘acrimonious divorce’ (DIB). Also in the case of registered partnerships the rate of 1% applies if the division is effected within one year of the partnership having come to an end and the parties concerned had been legally cohabiting for no less than one year uninterruptedly on the day it ended.
The reduced rate of 1% applies irrespective of the number of properties that have to be divided as a result of the relational break-up. In other words, not only the family home but other property too (e.g. a site, a rented apartment, professional premises...) can be divided at the 1% rate.
In theory, an allowance continues to exist in cases where the division is the result of a relational break-up that does not qualify for the reduced rate but which remains subject to the 2.5% rate. This could be the case if the DMC instrument dates from 2014 for instance and the divorce does not become final until 2015.
Since when? Divisions within the framework of a relational break-up usually take immediate effect on the basis of a notarial instrument. In that case, the date of the authentic instrument will be decisive. If the instrument was drawn up after 1 January 2015, the reduced rate will apply.
******************** Lloyd Georgelaan 11 I 1000 Brussels www.berquinnotarissen.be
3. Valuation of usufruct: at long last a (limited civil law) statutory system
Eric Spruyt, notary-partner Berquin Notarissen cvba, Professor at KU Leuven and Fiscale Hogeschool (Tax College)
April 2015
Up and until now, the correct valuation of usufruct was left to the legal profession. Only the fiscal legislator got involved in the Succession and Registration Duties Code. But recently - as of 25 January 2015 - all that has changed. With the Law of 22 May 2014, followed by the Ministerial Decree of 22 December 2014, the legislator has, albeit within a limited field of application, imposed valuation rules that must be referred to if the parties are unable to come to an agreement about the valuation themselves.
The old way
Up and until now, the issue of valuing the right of usufruct was left to practice. This was for instance the case if the usufruct the surviving spouse or legal partner had acquired under inheritance law had to be "converted" (art. 745sexies and art. 745octies, §3 C. C. respectively). Even in situations where the surviving spouse/partner-usufructuary, together with the children-bare owners, proceeded to sell the property appertaining to the estate of the deceased parent and the proceeds subsequently had to be divided between the usufructuary and the bare owners. In cases like these, it was left up to the legal profession (usually the notary in these matters) to calculate the value of the usufruct with the tools at his disposal. The Civil Code (C. C.) proved to be of little use here because it only offered broad criteria which, on account of their vagueness - which left room for differences of interpretation - created more legal uncertainty than it offered solutions. On the issue of conversion, former art. 745sexies, §3 C. C. for instance provided in relation to the valuation of the usufruct that "among other matters and depending on the circumstances, the value and the return on the assets, the associated liabilities and charges and the life expectancy of the usufructuary shall be taken into consideration".
This didn't exactly shed an awful light on things. So how was in dealt with in practice? A variety of mortality tables were resorted to. For one, the one the taxman uses to calculate the usufruct for the purpose of inheritance tax or registration duties (articles 21, Inheritance Tax Code and 47 of the Registration Duties Code, which, as far as Flemish inheritance tax and registration duties are concerned, can currently be found in the Flemish Tax Code (FTC) under articles 2.7.3.3.2, 1st paragraph, 5° FTC and 2.9.3.0.4, §1 FTC). As these date back to the 30s of the previous century, it is fair to say that they are somewhat outdated. Life expectancy in those days was obviously not what it is now. At that, these fiscal tables do not differentiate between men and women. This is one of the reasons why preference was given to more recent mortality tables such as the ones by Ledoux or Schryvers. It was not uncommon to look for the truth somewhere in the middle and to opt for an average of the various calculation methods.
Once the usufruct had been calculated by the advisor on duty, there were two options. Either the parties came to an agreement and settled on the computation method the notary proposed. Or, if no consensus could be reached, the issue had to be settled by the judge. However, in the absence of clear and imperative law, the parties didn't have the faintest idea about what value the judge would ultimately put on the usufruct. As this was rather unsatisfactory, the legislator decided it was time to intervene.
The statutory conversion tables
The new statutory system dates from the spring of 2014 (Law of 22 May 2014). However, it only came into effect on 25 January 2015 because the competent minister still had to work out the conversion tables. Meanwhile, they were laid down as per Ministerial Decree of 22 December 2014 and came into effect ten days after they were published in the Belgisch Staatsblad [Belgian Official Gazette].
The Ministerial Decree offers two conversion tables: one for men and one for women (cf. the Annex to the Decree). The conversion tables define the value of the usufruct as a percentage of the normal market value of the assets encumbered with usufruct, with due regard for a number of factors. The minister will update these conversion tables on 1 July of each year and publish them in the Belgisch Staatsblad. The new statutory system only applies to lifelong usufruct.
Only applicable to conversions of usufruct acquired under inheritance law
In principle, the scope of the statutorily compulsory valuation arrangement discussed here is limited. After all, it has been provided for under article 745sexies, §3 C. C. which regulates the conversion of usufruct the surviving spouse or the surviving common law (!) partner acquired under inheritance law (as regards the latter, cf. the reference to art. 745sexies, §3 C. C. featuring in article 745octies, §3 C. C.).
The division into usufruct and bare ownership following the opening of the succession is -aside from the possible frustrations at a human level, not to mention in cases of conflict - not exactly conducive to efficient asset management. This is why the legal process of conversion of usufruct acquired under inheritance law by the surviving spouse and the surviving common law partner was introduced in our inheritance law. Conversion right is the right of the surviving spouse or of the bare owner to ask that usufruct be converted into an absolute interest, a sum of money or a guaranteed and indexed lifetime annuity (art. 745quater, §1 C. C.). This conversion can be implemented by mutual agreement but can also be enforced before the court (art. 745sexies C. C.). The law is fairly detailed about who can demand what assets are converted and when, and about the procedural aspects.
Binding before the judge only
Even after 25 January 2015, the parties are still free to assess the value of the usufruct in any manner they deem fit when they decide to convert usufruct acquired under inheritance law. The judge will only enforce the new statutory rules when the parties involved cannot come to an agreement. In certain cases, even the judge is not bound by them. If, in view of the usufructuary's health (e.g. a terminal illness), the life expectancy is clearly lower than specified in the statutory conversion tables, the judge can either deny the conversion or disregard the statutory tables and impose other conversion terms. In other words, the judge has discretionary powers. Time of the valuation
New article 745sexies, §3 C. C. also very explicitly provides that, if the statutory conversion tables are to be applied, the date at which the conversion application is filed with the court must be taken into consideration and this both in terms of the value of the property and of the age of the usufructuary. This is no coincidence as the legislator wanted to prevent that proceedings would be marred by dilatory tactics (on the part of the bare owner).
Retention of usufruct
The law also specifically provides that the usufructuary retains his usufruct on the assets until such time as he has effectively been paid the capitalisation value of his usufruct. It can be deduced from this that the usufructuary retains the fruits of the assets (rental income, interests, etc.) until that moment in time but that, on the other hand, he also remains liable for the interests on any liabilities ensuing from the inheritance until that date, the foregoing in application of articles 586 and 612 C. C.
It furthermore transpires from this piece of legislation that the sum due to the usufructuary does not accrue any interests for the usufructuary until the date of effective payment either.
Special case: stepchildren
In conclusion, it is worth noting that article 745quinquies, §3 C. C. has remained unchanged. This statutory provision provides, as regards the calculation of the usufruct, for a type of “instant ageing process" of the surviving spouse if there are stepchildren involved to ensure that the latter are protected. In situations like these, the surviving spouse is legally deemed to be at least 20 years older than the eldest child from the deceased partner's previous relationship!
Useful in other situations too
Even though the focus of the new statutory arrangement lies on the conversion of usufruct the surviving spouse / legal partner acquired under inheritance law, the Law of 22 May 2014 also introduced a new article 624/1 C. C. This article stipulates that - unless otherwise agreed between the parties - the capitalised value of a lifelong usufruct or bare ownership encumbered with lifelong usufruct shall be calculated in accordance with article 745sexies, §3 C. C. As a result, the new rules can have a far wider scope in practice. For instance with regard to a piece of property if, following the death of a parent, the surviving spouse, who enjoys partial usufruct of the property, decides, in consultation with the children (who have become part-bare owners of the property), to sell the property in question. If the notary divides the proceeds of the sale between the surviving spouse and the children, he will use the new valuation rules, unless the parties explicitly opt for a different computation method (e.g. based on different mortality tables).
And from a tax point of view?
The new valuation rules in matters of usufruct have been inscribed in the Civil Code and consequently have no tax implications. As a result, the taxman will continue to apply the existing (antiquated) conversion tables when calculating the usufruct for inheritance tax purposes (once the declaration of estate has been filed).
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