Succession planning for property assets structure it in a way that makes sense from a civil and tax law perspective
The prolonged period of low interest rates, which has persisted since the financial crisis, has made investing in property increasingly attractive in recent years. Furthermore, there is a housing shortage, particularly in conurbations. The low interest rates and the favourable prospects for letting and selling have led to a veritable property boom. All this has had consequences for owners of existing properties. Depending on the type of property, prices in Hamburg rose by between 6% and 14% in 2016 alone, according to the property market report.
What may sound tempting to potential sellers is increasingly leading to inheritance or gift tax pitfalls when it comes to existing properties. Consequently, there is a growing need to avoid inheritance tax through skilful succession planning, even for small to medium-sized property portfolios.
At the same time, rising property prices also offer the opportunity to generate income tax benefits during your lifetime. Read on to find out how you can benefit from skilful succession planning.
Various options for planning property succession
There are various options for transferring property to the next generation, but these differ considerably from one another not only in terms of the complexity of the process but also in terms of their consequences under civil and tax law.
1.) Fractional ownership
Co-ownership schemes arise when parents grant their children a share in their property whilst they are still alive, without making any further arrangements.
The advantage of this form of transfer lies in the simplicity of the process; no complex contracts are required in advance. Income, costs and liabilities relating to the properties are apportioned amongst the co-owners in accordance with their respective shares.
However, when it comes to sustainable wealth planning, the disadvantages of joint ownership outweigh the advantages:
- Each co-owner is free to dispose of their share as they see fit
- Insolvency practitioners may enforce a claim against a fractional owner’s share
- The allocation of costs and liabilities cannot be entered in the Land Register in a manner that deviates from the ownership shares
- Day-to-day management is complicated, as decisions can only be taken jointly
2.) Transfer subject to a reservation of usufruct
The Transfer subject to a reservation of usufruct is a popular way of involving the next generation in property ownership. By granting a right of usufruct, secured in the land register, in favour of the current owner, ownership of a property can be transferred whilst the income and rights of use remain with the current owner. In terms of gift tax, this can result in a significantly lower valuation of the property under certain circumstances. Furthermore, the previous owners retain their source of income or the right to continue living in their familiar surroundings.
However, particularly in the case of larger or more complex property structures, a transfer subject to a right of usufruct also entails significant disadvantages:
- Although the previous property owners retain the right to use the property, they can no longer sell it themselves
- The right of usufruct reduces the value of the property, meaning that it is highly unlikely that the owners will be able to obtain a mortgage against it
- Where there are several children and various properties, it is usually not possible to transfer individual properties to individual children on a value-based basis
3.) Transfer to a family property pool
Under Family pool is generally understood to mean a Family Trust in the legal form of a partnership, e.g. a civil-law partnership (GbR) or a limited partnership (KG). Depending on its intended purpose, it may be structured for commercial or non-commercial (asset management) purposes. In some circumstances, the legal form of a limited liability company (GmbH) may even be appropriate for a family pool.
Transferring property into a family trust is a more attractive option than fractional ownership or a usufruct arrangement, not only because of the disadvantages of those arrangements, but also because it offers a number of further advantages:
- Children and grandchildren, even those under the age of majority, may be granted a share in the estate, with their influence being phased in gradually
- The management structure can be organised independently of the shareholding structure
- Voting rights and profit shares can be structured flexibly
- Transfers of assets can be carried out simply by assigning shares in a company; this can even be done without the involvement of a notary
- Restrictions on the disposal of assets may be agreed
- Disputes over statutory shares can be avoided
- Rights of recovery may be agreed
- By transferring shares in stages, tax allowances can be utilised to the full
- In the case of larger estates, inheritance and gift tax can be almost entirely avoided by setting up a property company
- New opportunities for depreciation can be realised for income tax purposes
- Income can be distributed amongst family members in a way that reduces the tax rate
The family pool therefore offers numerous advantages when it comes to Transfer of property. To make the most of these, it is first necessary to carry out a detailed analysis of the current situation and then to define the individual wishes and goals of each family member. On this basis, a sensible plan can be drawn up.
We would be happy to advise you on the tax, company and inheritance law aspects of this matter.