A father died in November 2016, leaving his son and daughter as heirs, each entitled to half of the estate. The estate includes all the shares in the father’s private limited company, which owns eight commercial properties in the same town. The company uses two of the properties itself; the remaining six are let to third parties. Prior to the father’s death, the private limited company employed three people: the father himself, his partner and a member of staff responsible for minor maintenance and supervision. The heirs declare business assets of over €3.1 million and request the application of the business succession scheme (bor).
Why is the physical business so important?
The scheme offers a conditional exemption from inheritance tax on business assets. The aim of the scheme is to prevent heirs from having to sell a family business in order to pay inheritance tax. A crucial condition, however, is that the private limited company must carry on a substantive business within the meaning of the Income Tax Act. If the private limited company holds only investment assets, the exemption does not apply. The distinction between business operations and investment is therefore of great importance: in the case of a taxable acquisition of over €1.7 million, the exemption can save hundreds of thousands of euros in inheritance tax.
More than just standard asset management?
The son argues that the private limited company did indeed run a tangible business. He points to the clean-up work that was required after a bankrupt tenant had stored chemical substances without authorisation. Furthermore, the father lived on the premises as the property manager, which, according to the son, led to lower maintenance costs and improved lettability. Tenants had also carried out refurbishments that would yield a higher indirect return for the private limited company. The inspector disputes that these activities go beyond normal asset management.
Standard letting services
The court ruled in favour of the inspector. In the case of the management of immovable property, an enterprise only exists if the work carried out, by its nature and scope, goes beyond what is customary in the normal management of assets. Furthermore, that work must unambiguously be aimed at achieving a return that exceeds the normal return. The activities of the private limited company do not meet this two-fold criterion. After all, drawing up tenancy agreements, maintaining contact with tenants, managing accounts receivable, handling complaints and carrying out minor maintenance are activities that any landlord would undertake. The fact that the father lived on the premises does not alter this, as the son has not demonstrated that this actually led to a higher return.