Like a will, a gift is a voluntary disposition of property made in someone’s favour. Unlike a will, a gift is a voluntary disposition of property made during the donor’s lifetime, whereas a voluntary disposition of property made by will takes effect only after the testator’s death.
A lifetime gift may be made from the desire to benefit one person (one of the donor’s children, for example) at the expense of the statutory heirs, but most gifts are currently made mainly for tax reasons to limit the amount of inheritance tax payable.
So a clear distinction has to be made between the civil law and tax consequences of a gift.
A distinction also has to be made between gifts of Belgian real property and gifts of personal property (stocks, bonds, money, paintings, life insurance monies, etc.)
How can a gift be made?
The Civil Code states that a gift must normally be made through a notary by registered notarized deed. However, legal writers and case law recognize other forms of gifts: from hand to hand, indirect, effected through a foreign notary.
Gift effected through a Belgian notary
A gift of real property in Belgium must be effected through a Belgian notary.
The notarized deed will be submitted to the registry of deeds office and gift duty will be levied on the basis of the value declared by the parties. The Belgian tax authorities have two years in which to challenge the declared value.
It is usually safest to err on the side of caution and have the property independently valued beforehand so as to be on firm ground in any future discussion with the tax authorities.
The donor’s (the person making the gift) habitual place of residence is what determines which tax regime will apply: Brussels, Flemish or Walloon gift duty.
Mr Z lives in Brussels and gifts his apartment situated in Knokke in the Flemish region. The rates of duty will be those in force in the Brussels region.
A gift of real property may relate to all or part of the property.
For example, Mr Z may give 50% of his seaside apartment to his two children who will therefore each acquire a 25% undivided joint ownership share.
After 3 years have elapsed, Mr Z can gift the other half.
The point of gifting the property in 2 stages is to reduce the amount of the gift duty payable.
Gift duty, like income tax, is a graduated assessment – the greater the value of the gift, the higher the rate of duty it attracts. The easiest way to mitigate this is to split the gift by notarized deeds 3 years apart evidencing what share of the property is being gifted.
If the property to be gifted has a very high value, it will probably have to be gifted in 3 stages such that the parties will engage in a 9-year estate transfer scheme.
What will happen if the donor dies before 3 years elapse?
The tax authorities will consider that the property has not gone out of the deceased’s estate and the heirs will have to declare it as if the gift had not been made.
The gift duty paid will not be lost; it will be considered as an advance on the inheritance tax payable.
Gifts from hand to hand
By definition, a gift by from hand to hand implies a physical transfer. Mr Z hands a painting or a sum of money in cash to his nephew.
The gift arrangements can (but do not have to) be evidenced in an ordinary written and signed document; a notarized deed is not required.
This gift can be submitted for registration (ordinary written and signed document or notarized deed) and duty will then be payable based on the family relationship and the region where the donor habitually resides.
Unlike gifts of real property, the donor does not have to remain living for 5 years; once the gift duty has been paid, the property goes out of the donor’s estate for tax purposes and does not have to be declared for inheritance tax.
Also, the tax rate on gifts of personal property is much more attractive than for gifts of real property.
For example, the rate of duty is 3% (3.3% in the Walloon Region) on a gift of any amount to children or grandchildren in the direct line, and currently 7% for gifts to others (except in the Walloon Region, where it is 5.5% or 7.7% depending on the case).
But by far most gifts are made in the form of an indirect gift, although it is commonly referred to as a “gift from hand to hand”.
Indirect gift
The classic way is by bank transfer from the donor’s account to that of the donee. It is important that no transaction reference should be included with the transfer.
A gift can be made this way without paying a single cent in duty!
For this, the donor must remain living for at least 3 years after the gift.
A donor who knows he is dying or is naturally prudent should preferably register the gift and pay 3% duty.
In this case, the 3% payable should be looked on as a death insurance – the price of peace of mind.
If the gift is not registered and the 3% duty paid during the donor’s lifetime, the beneficiary may have to pay up to 30% in inheritance tax!