On 17 March, Flemish parliament adopted the announced decree on the reform of the Flemish Tax Code. The decree abolishes the tax benefit of so-called duo legacies and introduces a tax benefit for legacies to friends and distant relatives, as well as a 0% tax rate for gifts and legacies to charities.
Abolishment duo legacies
A duo legacy is a planning technique used in wills that lowers the tax burden on legacies made to friends and distant relatives. This planning technique requires two legacies: one to a charity and one to friends and / or distant relatives. The charity is burdened with the payment of the inheritance tax due on both legacies. Until now, inheritance tax is due by charities at the flat tax rate of 8,5%. Friends and distant relatives are subject to progressive inheritance tax rates up to 55%.
Example: If a testator leaves 1.000 to a friend, this friend pays (approximately) 550 inheritance tax and only receives a net legacy of (approximately) 450.
However, if the testator makes a legacy of 600 to a friend and a legacy of 400 to a charity, stipulating that the charity must pay the inheritance tax due on the friend’s legacy, the friend’s net legacy will be much higher. The inheritance tax due on the friend’s legacy amounts to (approximately) 55% on 600, i.e. 330, due by the charity. The inheritance tax due on the charity’s legacy amounts to 8,5% on 400, i.e. 34. Following payment of the inheritance tax on both legacies, the charity receives a net legacy of 36 (400 – 330 – 34 = 36). The friend receives a net legacy of 600 instead of 450.
This tax benefit is abolished by the decree as from 1 July 2021. The date of decease is decisive, not the date of the will. This means that the tax benefit is also abolished for duo legacies included in wills drawn up prior to 1 July 2021 when the testator dies as from 1 July 2021.
Wills including duo legacies must therefore be revised.
A friendly legacy
The tax benefit for legacies made to friends and / or distant relatives allows the testator to legate up to €15.000 to one or more friends and / or distant family members that will be subject to a low flat inheritance tax rate of 3% instead of 25%. This tax benefit therefore allows a saving of up to 22% inheritance tax on €15.000, i.e. €3.300.
The will must explicitly include this legacy and it must be clear which persons can claim the tax benefit. If the testator appoints several beneficiaries, the tax benefit is granted on a pro rata basis, unless the testator stipulated a different ratio. The benefit is limited to natural persons, with exclusion of partners and descendants.
Earlier, the draft decree required such a legacy to be included in a notarial will for the tax benefit to be applicable. This requirement has however not been taken over in the final decree. The tax benefit can be claimed, irrespective the form of the will (holographic, notarial or international).
The tax benefit for legacies to friends will be applicable to estates opened as from 1 July 2021.
If you want your friends and / or distant relatives to benefit from this tax advantage, you can already amend your will.
Tax-free gifts and legacies to charities
The Flemish Region introduces a 0% tax rate for gifts and legacies made to charities. Currently, gifts and legacies made to charities are subject to lower flat tax rates in the Flemish Region. Gifts to charities are currently subject to a 5,5% gift tax rate, legacies are subject to an 8,5% inheritance tax rate.
Private foundation excluded
Gifts and legacies made to private foundations cannot benefit from the tax exemption. Gifts made to a private foundation remain subject to a 5,5% gift tax rate. Legacies made to a private foundation remain subject to an 8,5% inheritance tax rate.
Charities established within the EEA
It is required for the charity to be established within the EEA for the exemptions to apply.
Brexit
Following Brexit, charities established in the United Kingdom will not be able to benefit from the 0% tax rate for gifts and legacies.
Moreover, since Brexit, UK charities can no longer benefit from the lower flat rates of 5,5% gift tax and 8,5% inheritance tax either. A gift to a UK charity is now subject to a flat gift tax rate of 7%. Legacies made to a UK charity are subject to the highest progressive inheritance tax rates up to 55%.
Entry into force
For charities established within the EEA, the 0% gift tax rate will enter into force as from 1 July 2021. The 0% inheritance tax rate for charities established within the EEA will be applicable to estates opened as from 1 July 2021.
At least from a tax perspective, nothing prevents making gifts and legacies to charities established within the EEA!
Scope of application limited to residents of the Flemish Region
The aforesaid changes only apply in the Flemish Region.
In principle, Flemish gift tax will be applicable if the donor is a resident of the Flemish Region at the moment of the gift. However, if the donor had his / her residence in more than one Belgian Region during the 5 years preceding the gift, Flemish gift tax is due if the donor’s residence was located in the Flemish Region for the longest time (during these 5 preceding years).
In principle, Flemish inheritance tax will be applicable if the testator is a resident of the Flemish Region on his / her death. However, if the testator had his / her residence in more than one Belgian Region during the 5 years preceding the death, Flemish inheritance tax is due if the testator’s residence was located in the Flemish Region for the longest time (during these 5 preceding years).
Revise your will! Gift and legate to charity!
Residents of the Flemish Region that have a will including a duo legacy must revise their will.
If you want to make tax friendly legacies to friends and / or distant relatives, you can already amend your will.
Finally, residents of the Flemish Region can make tax-free gifts and legacies to charities established within the EEA!
