As part of inheritance planning, the gift of real estate is common. However, when you own both domestic and foreign property, the question arises which property you donate first. Therefore, this article provides more information on the consequences of the push-up effect in inheritance tax.
How do you donate real estate?
You always donate real estate via a notarial deed in the country in which the property is located. You therefore donate a property located in Flanders via a Belgian notary. A property located in Spain, you donate via a local notary. You only pay the local gift tax.
What is the "push-up effect"?
If you donate property in Flanders, the beneficiaries pay gift tax. This gift tax has progressive rates. For example, for direct line beneficiaries and partners, the rates are 3-9-18-27%. If you make several property donations within a 3-year period, the progressive rates apply as if you made one donation. Thus, subsequent gifts are taxed at the higher rates. This is the accumulation effect in gift tax. So for this reason, you donate in phases and at 3-year intervals. This way, you enjoy the lower rates.
On a property donation, the beneficiaries do not pay inheritance tax later, upon death. However, if the donor dies within three years of a property donation, the value of this donation is added to the taxable basis of inheritance tax. To this, the progressive rates of inheritance tax (e.g. 3-9-27% in direct line and partner) are applied. This is the accumulation effect in inheritance tax: in itself, these donations are not taxed again, but they count towards the calculation of the rate. And thus results in higher taxation. You can avoid this by donating foreign property first.
Example 1: you donate real estate in Belgium
You own three properties: (1) a villa worth 500,000 euros, (2) a flat worth 250,000 euros, (3) your residence in Alicante, Spain of 250,000 euros. You decide to gift the flat to your only child. The gift tax is then 13,500 euros.
| Disc in euro | tariff | |
|---|---|---|
| From 0.01 to 150,000 | 3 | |
| From 150,000.01 to 250,000 | 9 | |
| From 250,000.01 to 450,000 | 18 | |
| From 450,000.01 | 27 |
You die within three years of this gift. The estate for inheritance tax purposes will then still have a value of €750,000. You need to add to this the 250,000 euros of the flat. A total of 1,000,000 euros. There is no inheritance tax on the first 250,000 euros. After all, gift tax has already been paid on this. But the lower brackets of 3% and 9% have already been utilised as a result. The remaining EUR 750,000 is therefore taxed at the highest rate of 27%. The inheritance tax is EUR 202,500.
| Disc in euro | % |
|---|---|
| from 0.01 to 50,000 | 3 |
| from 50,000.01 to 250,000 | 9 |
| from 250,000.01 | 27 |
Total tax: 216,000 euros.
Be careful with a gift in full ownership. Beneficiaries may pay higher sales charges later.
Example 2: you donate foreign property
The accumulation effect in inheritance tax only applies to donations that were registered or had to be registered in Belgium. Donations of foreign property do not have to be registered in Belgium. Suppose instead of the Belgian flat, you donate the residence in Alicante, Spain.
In Alicante, there is an exemption of 100,000 euros in gift tax for the direct line. The taxable base in Spain is then €150,000, taxed at the progressive rates of 7.65 to 34%. This amount is reduced by 99% in the Comunitat Valenciana. Finally, the Spanish gift tax comes to around 214 euros. Municipal capital gains tax comes to €2,000. To this may be added national capital gains tax at.
If you die within three years, the accumulation effect does not come into play. This means that the taxable basis of the estate in inheritance tax is EUR 750,000, and you can use all the brackets. The inheritance tax is lower as a result: €154,500.
Total tax: 156,714 euros.
Some Spanish regions have quite high gift taxes. Consider Catalonia, for example. If the second residence were located in Portugal, the foreign donation is more interesting. Indeed, in Portugal, there is a gift tax exemption for straight line heirs and partners. One then only pays a stamp duty of 0.8%.
Read more about gift tax in Spain.
Decision: accumulation effect in inheritance tax
With this contribution, we want to show that a foreign property donation is worth considering. Of course, you should also take the local taxation into account. Personal wishes of the family members also play a major role.
Do you have questions about real estate gifting abroad? If so, please feel free to contact on. We can discuss the various options with you.
Update February 2024
