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Usufructuary manages, bare owner pays?
In many families, parents donate their securities portfolio to their children, while retaining the usufruct. In practice, this means that the parents continue to manage the assets. For example, they decide when securities are purchased or sold.
From a tax perspective, however, responsibility lies elsewhere. When a capital gain is realised upon a sale, the bare owner is in principle regarded as the taxpayer. From a legal perspective, this is logical, as the bare owner is the sole owner of the assets. The usufructuary is only entitled to the income from the portfolio, such as interest or dividends.
A capital gain is not regarded for tax purposes as a ‘fruit’, but rather as an increase in the value of the asset itself. As a result, a peculiar situation can arise: the usufructuary often determines the investment policy and the timing of the sale, while the tax bill falls to the bare owner.
When management is entrusted to a bank or asset manager, this principle does not change. Even in situations where it has been stipulated in the deed of gift that capital gains accrue to the usufructuary, the bare owner remains liable to tax.
Capital gains tax: withholding by the bank or declaration?
When a capital gain is realised, the financial institution will in many cases automatically withhold the tax at source. This system is often referred to as an opt-in.
In this case, the tax due is immediately deducted from the sale proceeds within the portfolio, avoiding the bare owner having to pay the tax from their own funds.
However, this system also has drawbacks. The bank does not take into account certain tax optimisations, such as:
a higher historical acquisition value
the annual exemption on capital gains
the offsetting of any capital losses
The exempt portion currently amounts to €10,000 euros per taxpayer and can increase to €15,000 euros with indexation.
When several bare owners jointly own a portfolio, each can use their own exemption. Those who wish to make use of these optimisations will need to report the capital gain in their personal income tax return.
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Opt-in or opt-out: an important choice
Another point to consider is how any tax refund is handled. When the bank withholds the tax at source, it is done using funds from the portfolio to which the usufruct applies. If it later turns out that too much tax has been paid, any refund is paid personally to the bare owner.
This can give rise to practical or financial questions within families. That is why it is also possible to choose an opt-out. In that case, no tax is withheld at source and the bare owner must declare and pay the capital gain themselves.
From a tax perspective, this can be more advantageous, but it usually means that the tax must be financed outside the portfolio using private funds. In addition, the agreement of all account holders is generally required.
The choice between opt-in and opt-out is therefore more than an administrative formality. In a family context, it is often advisable to make clear arrangements in this regard.
Impact on existing succession planning
The introduction of a capital gains tax does not in itself affect the validity of existing donations or usufruct structures. Nevertheless, the new tax may influence the financial balance within a family planning arrangement. The person making the investment decisions is not necessarily the same as the person liable for the tax.
This makes it important to review existing structures.
Well-thought-out succession planning does not stop at the donation itself. The tax consequences of the chosen structure should also be evaluated on a regular basis. With the introduction of a capital gains tax, this exercise becomes even more relevant.
Do you need advice on capital gains tax and usufruct? Do not hesitate to contact us. We will be happy to assist you.
