Many people are aware that a substantial exemption can be applied when business assets are gifted or inherited. However, not everyone realises that the business must then continue to operate for at least five years.
BOR
Where, in 2024, business assets (or shares in which business assets are embodied) are acquired through inheritance or a gift, as much as €1,325,253 of this amount is fully (100%) from inheritance and gift tax. The excess amount is exempt to the tune of 83%. This exemption is known as the business succession scheme (BOR).
The rationale behind this exemption is that inheritance and gift tax should not stand in the way of genuine business succession. For this reason, the application of the exemption is subject to the condition that:
- the acquired business (or the acquired shares) must remain in the possession of the heir or donor for the five years following the death or the date of the gift AND;
- The company’s operations must continue during this period.
If this requirement for continuation is not met, the inheritance or gift tax that has not been levied must still be paid to the Tax and Customs Administration.
Bankruptcy
At Zeeland-West Brabant District Court a case A case was pending in which parents had gifted (certificates of) shares in a private limited company to their son in 2014. The BOR was applied to this gift. In 2016, the son was issued with a gift tax assessment for an amount of nearly €445,000; this amount has not yet been collected because the BOR applies.
My father passed away in 2017. That, in itself, is of course irrelevant to the continuity requirement. However, when the private limited company was declared bankrupt some time later, the Tax and Customs Administration noted that the company’s business had ceased within the continuation period linked to the application of the BOR (within five years of the gift in 2014). The Tax and Customs Administration is therefore demanding that the son pay the inheritance tax that was not collected in 2016 (€445,000).
Error
The mother and son are attempting to avert this by entering into an agreement on the grounds of mistake. Under this agreement, the son has returned the shares (or share certificates) to his mother. Mistake is a legal ground on which the gift can be set aside. If the gift is set aside, the gift tax assessment can be reversed. And in that case, the son will, of course, not have to pay this tax after all.
The Court ruled that there was no mistake. A contract is deemed to have been concluded under a mistake if, had the facts been correctly presented, it would not have been concluded. However, according to the Court, the mother and son have not sufficiently substantiated that, at the time of concluding the gift agreement, they were not sufficiently aware that the BOF would be reversed in the event of the BV’s bankruptcy or that, had they been aware of this, they would not have made the gift, or would have done so under different conditions. The Tax and Customs Administration is therefore rightly claiming the gift tax from the son after the event.