Family trusts and property: pooling assets, safeguarding future generations

How can a property portfolio that has grown over generations be distributed fairly amongst children and grandchildren, kept within the family, and at the same time structured in a tax-efficient manner? A family trust may offer one possible solution.

A typical starting point is a portfolio of let properties that has been held as part of the family’s assets for decades. The aim is not to fragment it, but to keep it as a single, consolidated portfolio. Unlike cash, however, property can hardly be divided ‘fairly’ amongst several children. Added to this is a tax issue: many buildings have long since been fully depreciated. The ongoing rental income is therefore subject to income tax almost in full – at the top rate of up to 45 per cent plus surcharges.

One possible approach is to sell the properties to a family trust set up specifically for this purpose. If the parents have owned the properties for more than ten years, the sale to the trust can be carried out free of income tax. The foundation can finance the purchase price through an interest-bearing loan from the parents, without any immediate outflow of cash. Alternatively, however, bank loans are also possible should the parents require liquidity. From a financial perspective, the properties are thus transferred into the legal framework of the trust and can be held in perpetuity, with the rental income providing financial support for the family across generations.

At the same time, this creates a new depreciation base for the foundation. The portion of the purchase price attributable to the building can be depreciated on a regular basis over 50 years, thereby reducing the taxable rental income. This income is currently subject to corporation tax at a rate of 15 per cent; a reduction to 10 per cent is planned from 2028 onwards. As the foundation does not carry out any commercial activity when merely managing assets, no trade tax is payable. Together with interest expenses, this allows the current taxable income to be significantly reduced.

From the parents’ perspective, rental income is treated as interest income, which is regularly subject to a flat-rate withholding tax of 25 per cent plus surcharges. At the same time, the loan receivables can be gradually transferred to children and grandchildren every ten years, free of gift tax, within the limits of the tax-free allowances. Monetary claims can be distributed much more flexibly than property.

The trust may name children and grandchildren as beneficiaries and make distributions, which are also taxed at the flat-rate withholding tax rate. If a loan creditor subsequently moves abroad, the mere existence of the claim does not, in principle, trigger exit taxation.

The establishment requires a deed of foundation, including articles of association, as well as approval by the relevant authority. There is no statutory minimum capital requirement; in practice, however, there should be at least EUR 100,000 in equity capital. The structure usually only becomes economically viable when the value of the property portfolio is in the millions, for example around EUR 3 to 5 million.

It should be noted that the sale to the foundation triggers land transfer tax and that an inheritance substitute tax is payable every 30 years, although this can be paid in instalments over 30 years. If the foundation subsequently sells the property, any profits are tax-free after the ten-year holding period has elapsed – as is the case for private individuals.

A family trust is not a tax-saving scheme, but a long-term tool for pooling property assets, for tax planning and for the orderly transfer of assets across generations.