Buying a property in Portugal is a good time to think about inheritance planning. This involves looking at the most advantageous method of transferring assets to your next of kin. One of the ways is a split purchase. This article will provide more information on split purchase in Portugal.
What is a split purchase?
In a split purchase, the parents buy the usufruct (usufruto) and children the bare ownership of the property. Thanks to usufruct, the parents enjoy the right to fully use or rent the property. The children later obtain full ownership upon the parents' death.
Why is a split purchase advantageous?
In Portugal, straight line heirs (including the surviving spouse and children) are exempt from inheritance tax. The other heirs pay a flat rate of 10%. Active planning to avoid Portuguese inheritance tax is therefore not necessary in most cases.
The main reason to consider a split purchase is the avoidance of Flemish inheritance tax. If you die as a Flemish resident, your heirs will pay Flemish inheritance tax on the entire estate, including the property in Portugal. In other words, the property in Portugal is included in the estate's estate. Flemish inheritance tax rates thus apply. Since one does not tax the extinction of usufruct in Flanders, this is therefore a way to avoid a high tax bill.
How do you calculate the value of usufruct?
The value of the bare ownership in Portugal depends on the age of the usufructuary. An example. You are 59 years old and you buy a villa worth 500,000 euros. The value of the usufruct amounts to 40% of the purchase price: 200,000 euros. The bare ownership is then 300,000 euros.
What are the formalities?
Since the split purchase is a technique for avoiding inheritance tax in Flanders, we should take into account Flemish legislation and the views of the Flemish tax authorities (Vlabel) in this regard.
Thus, there should be no covert favouritism in favour of the bare owners. This means that the children must prove that they already had sufficient funds of their own before the purchase. In practice, you therefore donate the necessary funds to the children prior to the purchase. They must be able to prove this donation. If the existence of the donation is not proven, Vlabel considers the property to be a bequest. And a bequest is taxed in accordance with inheritance tax.
It is therefore important that in the case of a split purchase we before compromise a roadmap format. In doing so, we take into account the state of the buying process.
The disadvantage of a split purchase is that the parents cannot sell the property without the children's agreement. Either there is sufficient trust, or we have to (notarise) strict agreements.
However, the favourable tax regime in Portugal also makes another track possible. And that is, for example, later, after purchase, donate the bare ownership in Portugal. You will then only pay Portuguese taxes. The Portuguese gift tax for donating property to children is currently only 0.8% per cent. This is provided you donate only after two years. If you donate within the two years, you may also pay capital gains tax.
Do you have questions about a split purchase in Portugal? Or do you have questions about investing in Portugal? If so, please feel free to contact on.