Properly preparing your succession is essential to avoid conflicts between inheritors, to optimise the transmission of your estate and to minimise fiscal charges. Being closely tied to your personal situation, the matter is both sensitive yet very important. The amounts in play are usually considerable, especially concerning real estate transmission. All the more reason to look over all your options in terms of property transmission in Luxembourg.
How does real estate transmission work?
In order for property transmission to be carried out in the optimum conditions, there are several elements to know and to anticipate, as well as some advice to follow if possible. Let’s start by defining the two types of transmission:
- Succession, the action in which goods and property are inherited from the deceased (donor) to the inheritors.
- Donation, the action in which a property is transmitted from the donor to the donee during his lifetime.
There are two types of transmission: a lifetime donation, or succession at the passing of the donor.
Property is inherited in the same way as the rest of the estate. The objective of this article is not to go into the details of the inheritance rules, as the contents of myWEALTH address the matter in depth. It should be noted however that in Luxembourg, everything that is inherited in direct line is exonerated of inheritance rights.
By default, if there has been no succession planning, property is inherited jointly (indivision). Each inheritor receives a number of shares according to the applicable succession rules.
However, the article 815 of the Civil Code states that “no one can be obliged to remain in indivision”. This means that when there are multiple inheritors, only one can force the sale of the inherited property if the other inheritors choose not to buy his shares. The property is thus sold either by extrajudicial approach (the inheritors agree to sell the property on the market), or by judicial approach (a notary is in charge of the sale). In the two cases, these situations often generate a lot of tension between the inheritors. Yet, the outcome is always the dissipation of your hard-earned estate.
There are solutions to avoid such a situation.
Allocating your property to a chosen person
The first solution is to ensure that that a person of your choice inherits the property alone, which settles the question of indivision. This can be done:
- By drawing up a will. One or multiple properties can be attributed to one or multiple inheritors through a will. However, there are some legal limitations: the children or direct descendants cannot be disinherited, and a reserve must be respected. For example, for a two-child inheritance, two-thirds of the estate must be fairly distributed, and one-third can be distributed freely. The details of these distribution rules can be found on the myLIFE article “Inheritance: who gets what?”
A donation in direct descendance will cost 1,8% of the estimated venal value of the property without “dispense de rapport” – and 2,4% with “dispense de rapport”.
- Through a donation. This notarial contract allows you to give part of your estate to either a legal inheritor or a third person. This solution is subject to the same legal limitations and distribution rules. A donation in direct descendance will cost 1,8% of the estimated venal value of the property without “dispense de rapport” – and 2,4% with “dispense de rapport”. A dispense de rapport means that a favoured inheritor cannot be held accountable to the other inheritors, as long as the inheritance has been done within the legal limitations and distribution rules.
- Through a donation with reserve of usufruct. This solution allows the donor (the usufructuary) to transmit a property – for example his primary residence – to a donee (the bare-owner) all while keeping possession of the property until his passing.
Unifying your real estate
Another possibility to avoid estate dissipation is to create an SCI (“Société Civile Immobilière” – a company structure constituted for the ownership and management of property). An SCI allows you to unify your real estate, as the inheritors will not inherit portions of property but rather shares of a company. A single manager can be appointed, easing the management of the real estate and limiting the decision-making power of the associates/inheritors. This means that a single inheritor, or even a third person, can be appointed with the whole management of the family’s real estate thanks to the SCI.
Capital gain on inherited property
The sale of an inherited property will be subject to capital gain tax. For direct line of inheritance, a tax relief of 75,000€ is applied to the primary residence of the deceased. This tax relief is undividable, and is only applicable to one of the parents’ primary residences if they are separated.
If one of the parents does not live in his/her primary residence any more, and that he/she is certain that he/she will not return to it and that the property will not be kept by inheritors, it is often more beneficial to sell the property during the owner’s lifetime to avoid capital gain tax.
It should be noted that Luxembourg has not signed any double taxation agreement on inheritance or donation rights. An inheritor living abroad will therefore be subject to the applicable succession and donation laws of his country, as well as those in Luxembourg.
There can be a huge difference between one country and another. We therefore suggest that you contact your banker to analyse the specificities of your situation, to find solutions optimising the transmission of your estate.