Acquisition process abroad

This article provides interesting information on various aspects of the acquisition process abroad. Key points include:

• Split Purchase: This structure offers a solution: parents buy only the usufruct, while the children acquire the bare ownership. As a result, the usufruct automatically ends upon death, significantly reducing inheritance tax.
• Succession Planning for Foreign Real Estate: When buying a second home abroad, you must also consider local rules – most countries levy inheritance tax on real estate, regardless of the owner's nationality.
• Taxes and Other Costs: It is essential to know which costs and taxes apply to the purchase, any rental income, and inheritance tax. This applies to both domestic and international investments.

The above topics are discussed for various countries, including Spain, Portugal, France, and Italy. For those considering a holiday home in Spain, Carl Vorsselmans and Filip Berger from NB-Estates offer crucial insights into how the Spanish real estate market works.

What is a split purchase in Belgium?

In a split purchase, your children acquire the bare ownership of the property, while you buy the usufruct. This means you retain the right to live in or rent the property. Upon your death, the usufruct ends automatically, and your children become full owners. This allows you to avoid the property being included in the inheritance, reducing inheritance tax.

Since children often do not have the financial means to acquire the bare ownership, parents often choose to support them financially through a gift. This gift can be made via a bank transfer or registered mail. It is crucial that this gift takes place in a timely manner to prove that the children have financed the purchase with their own money.

Split purchase abroad

Anyone buying a second home abroad also benefits from careful succession planning. Most countries levy inheritance tax on real estate located within their borders, even if the owner is Belgian. Furthermore, all Belgian regions impose inheritance tax on the worldwide assets of their residents. However, inheritance tax paid abroad can be deducted from the Belgian taxable base.

Whether a split purchase is relevant depends on the country and local regulations. Below we specifically discuss the situation in Spain:

In Spain, the bare owner may face registration tax upon the death of the usufructuary. This tax is calculated based on the property value at the time of death and considers the age of the usufructuary at the time of purchase.

In some regions, a gift may be a more advantageous alternative to a split purchase. Although a gift of foreign real estate is not subject to gift tax in Belgium, it is subject to tax in Spain. Moreover, a gift of real estate in Spain may trigger capital gains tax, calculated on the difference between the purchase price and the market value at the time of the gift.

Tax on purchase

In Belgium, the purchase of an existing property is subject to registration fees. The rate varies by region, but for example, it is 12.5% in Brussels and Wallonia and 12% in Flanders. When purchasing a new property, you generally pay 21% VAT instead of registration fees. A property remains "new" until December 31 of the second year after its first use.

When purchasing a second home abroad, you must take into account local taxes:

Spain: When purchasing a property in Spain, you pay VAT (IGIC) or registration fees (ITP), depending on the VAT status of the seller and the intended use of the property. For private buyers of an existing property, only registration fees apply, ranging from 6% to 10%, depending on the region.

Tax on rental income

In Belgium, actual rental income from residential property is not taxed. Instead, you must report the non-indexed cadastral income in your tax return. This income is indexed by the tax authorities and increased by 40%.

Foreign real estate and Belgian Income tax

Since 2022, foreign real estate is also considered in Belgium based on cadastral income, rather than rental value. This follows repeated rulings by the European Court of Justice, which found that the old method led to unequal treatment of domestic and foreign real estate. If you buy, sell, or inherit foreign real estate, you must report it within four months via the MyMinfin online platform or a paper form. This ensures that a "Belgian" cadastral income is established for your foreign properties.

Reporting foreign real estate does not automatically mean it will be taxed in Belgium. This depends on the double taxation treaties Belgium has with other countries. In many cases, the country where the real estate is located may tax it, while Belgium must provide an exemption. However, foreign income may impact your overall tax rate in Belgium, as it is added to the taxable base.

Rental Income abroad

Spain: If you receive income from renting out your second home in Spain, you will also be taxed in Spain. The tax is calculated on the gross income, reduced by loan interest and repair and maintenance costs. Even if you do not rent the property and only use it for personal use, you must pay income tax in Spain on a fictitious rental income, based on the cadastral value.

Where do you want to buy?

Depending on where you want to establish your second home, tax and rental laws can vary significantly and affect the value of your property. Spain stands out particularly with its regions having specific regulations.

Carl Vorsselmans explains that in Spain, in addition to the usual tax considerations, there are specific rules regarding rental permits. "For example, in the Balearic Islands, the rental permit is tied to the property," explains Vorsselmans. "This permit is transferable. This can result in a price difference of 40% between two identical properties, depending on whether they have such a permit or not. In the Canary Islands, this permit is not transferable upon sale, and a new one must be applied for."

What do you want to buy?

"Many buyers simply want to diversify their investment portfolio and make a good investment," says Vorsselmans. "They are looking for real estate in top locations and expect the value to keep rising. They go there themselves and often do not think about renting it out."

"However, the people who know exactly what they want from the start are in the minority," says Filip Berger from New Buildings in Spain. "Most clients hesitate, and that’s understandable. Often, they are looking for a second home for personal use, but at the same time, they want to rent it out a little because the rental income is attractive. This creates a tension, because what’s good for renting may not be what they want for themselves. It’s up to us to get a clear picture of their ultimate preferences through conversations."

How long are you willing to wait?

The question is whether you want to enjoy your second home as soon as possible or if you are willing to wait for a project that is yet to start. If you have time to wait, it’s highly likely you can gain added value between signing the contract and the delivery. "In Spain, for example, there is a significant difference between the two," says Vorsselmans. "It’s a business model in itself." But Vorsselmans points out that this way of buying real estate is not for everyone. "People who have emotionally already decided that they want to buy something often do not want to wait two years. I had, for example, a 70-year-old client to whom I explained the advantage of waiting two years, but he responded, ‘It’s nice of you to suggest it, but for me, two years feels different than it does for you.’"

Source: L'Echo