Further to the inheritance tax reform and the changes planned in the matrimonial property law, the Flemish government has also announced a change to inheritance tax. The aim was not only to simplify, relax and reduce this grief-related tax, making it more in tune with the new inheritance law, but also to create more alignment with new family relationships. There was talk of a ‘drastic’ change and there were great expectations based on the proposals that have been circulating in recent weeks.
On Friday 23 February the government reached an agreement that was announced with a great drum roll. But is this really the revolutionary reform that was announced? Will the new rules also truly mean more freedom in planning and a fairer feeling with regard to this (high) grief-related tax?
They will, according to the Flemish Minister of Finance: ‘As promised, we are lowering inheritance tax. The tax burden will drop considerably thanks to this reform’. Based on the available texts we will now analyse the guidelines related to this reform and see whether the government's objectives have been met.
In preparation of the negotiations, various ambitious proposals were already launched. These included talk of full relief for the longest-surviving partner, a general relief of €250,000 for each heir and a specific rule for the best friend…. However, these extensive wish lists from the various parties were quickly tempered due to limitations in the budget (in the end a sum of €139 million was released). So (as always) it was necessary to seek a compromise and, after heavy negotiations, agreement was reached on the following measures:
- For the longest-surviving partner there will be additional inheritance tax relief on the first slice of €50,000 moveable goods;
- For children who lose both parents and are under the age of 21,
- inheritance tax relief will apply to the first slice of €75,000 of moveable goods
- plus relief on the parents' home;
- The rates for collateral heirs are being adapted whereby:
- the highest rate of 65% will be reduced to 55%
- the rate on the first €35,000 will be reduced to 25%;
- It is planned to allow a partial generation skip, whereby heirs may decide within a 1-year period to pass on their share of an inheritance for free to their own children (“generation skipping”)
But what do these measures mean in specific terms?
At first sight, they all appear to be very good measures and the focus lies on terms such as saving, relief and a fairer tax. But is this true? Based on the texts that are currently available we have already carried out some initial analysis.
New inheritance tax for the longest-surviving partner
Currently, the longest-surviving partner already enjoys relief on his/her share of the family home. In the future there will be additional relief on the first €50,000 of moveable goods (such as money, investments and art). Based on the current rates (3% of the first slice of €50,000) this means a saving of €1,500. Based on the texts available it is currently unclear how this relief will be applied specifically. Will the rate applying to the first slice of €50,000 be reduced to zero and will the rate of 9% immediately be applied to the next slice? Or will there really be a tax-free sum of €50,000 and will the remaining assets then be taxed according to the current rates (so once again starting at 3% and then increasing from 9% to 27%)? Of course it is very commendable that the government is introducing measures to limit the inheritance tax between partners. After all, it is felt to be very unfair that the longest-surviving partner must pay a considerable inheritance tax on what are usually jointly-saved assets. Sadly, the reform that is now being introduced generates very few savings in this area.
Furthermore, this measure is in stark contrast with recent activities at VLABEL (Flemish Tax Administration) whose opinions published in recent months systematically try to class all planning techniques between couples as fiscal abuse. Not only did the planning techniques related to the death and settlement clause come under attack, but also recent views on the use of an increment clause are causing uncertainty in the planning between partners. If it was the government's intention to achieve a fairer tax and legal certainty, it would perhaps have been better to take measures to recognise the familiar planning techniques (which have already been accepted for decades). The introduction of a limited tax-free sum cannot be considered as a measure that will facilitate the planning between partners.
New inheritance tax for children
The agreement also envisages a decline in inheritance tax for children. It means that, under certain circumstances, children will be entitled to a tax-free sum of €75,000, resulting in a saving of €3,750. Furthermore, they will not be obliged to pay any inheritance tax on their parents' home. Once again this is of course a commendable initiative, however, due to the specific terms, this saving will only be applied in exceptional cases. This means that this tax-free sum is only relevant to children under the age of 21 who also lose both parents. The first restriction to be introduced relates to the children's age. This is limited to 21 years, meaning that children above this age do not qualify for this relief. This can (and will) also lead to fiscal inequality between children that lose their parents. After all, a child who has not yet reached the age of 21 will not be required to pay inheritance tax on the first €75,000 and on his/her share of the home, while a brother or sister who might just have reached the age limit will be required to pay the full price.
Furthermore, this measure only applies to children who lose both parents. So, if just one of the parents dies they are not entitled to this tax reduction. Taking into consideration the evolution in new types of family relationship, this condition also leads to a certain fiscal unfairness in our opinion. For example, a child with divorced parents living with the mother and having no contact with the father will therefore not be entitled to this relief in the event of the mother's death. He/she will therefore be required to pay the normal inheritance tax and will not benefit from the tax-free sum. It is also doubtful whether the government will reach its intended objectives with this measure. After all, the new inheritance tax must lead to a simplification, and be better aligned with the new types of family relationship and the freedom created in the new inheritance law. The following example demonstrates that this new measure can cause an imbalanced situations in new family relationships.
Wendy and Jan have 1 daughter Olivia. After Wendy's death, Jan marries Isabelle and together they have a son Jeff. A few years later there is a further tragedy leading to Jan's death. Jan owned the family home and leaves a considerable sum in the bank to his 2 children. Both Olivia and her stepbrother Jeff inherit an equal share in the inheritance of their father, but Olivia has become an orphan (with the death of both parents) and therefore receives relief on her share of the home and the first €75,000 of the bill. Jeff on the other hand is not an orphan (as his mother Isabelle is still alive) and is therefore not entitled to such relief.
New inheritance tax for ‘collateral heirs’
The introduction of the new inheritance law means more freedom to leave a part of your assets to distant or non-family members. With such sky-high rates for this inheriting category such freedom risked remaining an empty promise. As a result, the Flemish government quickly announced that these rates should be drastically reduced.
Due to the announced reform, the highest rate of 65% will be abandoned (and replaced by 55%) and a new, lower rate of 25% for the first €35,000 will be introduced. Of course, this will mean a tax saving for heirs in the future but, in our opinion, will not lead to the drastic reduction in inheritance tax that was promised.
In the table below we compare a legacy of €250,000 inherited on the one hand by a brother or sister and on the other hand a ‘stranger’.
Indeed, the new rates lead to a tax saving, but with a total tax burden that still remains almost 50% it is doubtful that Flemish people will start to make massive use of it. The difference with the gift tax rate of 7%, whereby a tax of €17,500 is paid on a gift of €250,000, remains gigantic, making it important to consider planning very carefully.
Finally it has become possible to carry out a partial generation skip (passing inheritance from a grandparent to a grandchild). Today this remains a matter of 'all or nothing'. A parent who inherits and already wishes to benefit his/her own children must renounce the entire inheritance. In the future this parent will be able to decide to keep a part and to pass on a part to his/her children. It will be necessary to make this decision within a 1-year period. Again this is of course a good measure, but even with this option we remain of the opinion that it is better to discuss such generation skipping with all those involved, thus grandparents, parents and perhaps even the (grand)children, and to organise it yourself.
First of all it is important to mention that the above analysis is based on texts that were available the day after the press release. It will be important to await the final texts in order to reach further conclusions. The proposals will soon be discussed in more detail in the Flemish Parliament. The aim is to enforce the new rates along with the new federal inheritance law on 1 September 2018. Based on the principles we can, however, conclude that the Flemish government has made a creditable effort to reform and reduce the inheritance tax. Even so, it is doubtful that we can really call it a simplification and drastic reduction. It appears to be more of an agreement between various parties whereby everyone must win (part of) the battle. This means we continue to wait for the great revolution and the tax related to grief will continue to feel like one of the most unfair (asset) taxes in the coming years.
More than ever it the recommendation remains to start screening your own situation in good time and to develop your planning based on careful consideration and good information. This approach is the only one that can still help to reduce the enormous inheritance tax and that can provide the required legal certainty and peace of mind. And that is exactly the aim of asset planning. If you would like to carry out a screening of your own situation, please do not hesitate to contact us.