date | theme

03. May 2019 | Immobilien-GmbH-Benefits for renting land

05. July 2019 | Found real estate company & children participate in real estate (this contribution)

10. July 2019 | Selling property to children: Saving income and inheritance tax

A family company is in many ways excellent when buying a property. The family company is also a helpful means of saving gift tax or inheritance tax when parents transfer existing properties to their children. One of the three main advantages of starting a family company is that parents can retain control, that children's liability can be limited and that both parents and children can use their own tax exemption in the case of income tax. Of course, it depends on the starting position, but by clever advance planning a social contract can be developed that takes all relevant aspects into account. This applies in particular to the participation of the parents, the respective amount of the individual participations and, depending on the form of company, their limitation of liability.

A family society is a society consisting exclusively of family members. However, we only consider three alternative forms of company: the company civil law (GbR), the limited partnership (KG) and the GmbH & Co. KG. Our consideration should be essentially uniform, but we also deal with special features. It is important to point out that all three types of companies are partnerships.

Although a family company can also be founded in the form of a corporation, in this article we want to concentrate exclusively on the mentioned partnerships. The reason for this omission is that there are sometimes considerable differences between a partnership and a limited company in connection with real estate.

1.1. civil law company (GbR)

The GbR is a private-law company in which the shareholders pursue a common goal. In our view, this is the acquisition or holding and management of real estate. All GbR shareholders are subject to the regulation that they are personally liable. This means that a creditor of GbR can claim his claims in full from each shareholder. Each shareholder is obliged to stand with his entire assets.

1.2. Limited partnership (KG)

The KG is a commercial company. It is characterized in that here two different types of adhesion are present side by side. A distinction is thus made between at least one full shareholder (complementary) and at least one shareholder (commander). The general partner is liable as a GbR shareholder, namely with his entire assets. In contrast, the limited partner has to be liable only with the share which he enters as his share of the company assets in the social contract. Its liability is therefore limited to the amount of its deposit.

1.3. GmbH & Co. KG

GmbH & Co. KG is basically a limited partnership, but a limited liability company (GmbH) assumes the position of general partner. This has the advantage that the GmbH appears as a full owner, but actually, due to its limited liability, only up to a certain amount, namely only up to the amount of its own GmbH company assets. While the GmbH is a legal entity, the other limited partners are natural persons. They are also only liable with their deposit.

In the case of our family company, the family members first establish a GmbH, which then joins the subsequent foundation of GmbH & Co. KG as a general partner. The family members, on the other hand, join the GmbH & Co. KG as limited partners.

Preliminary establishment of a family company

When establishing a family company, you already lay the foundation of a longer-term enterprise. In addition, one usually sets the course for the future transfer of real estate assets to the children. Therefore, careful planning in advance of the establishment is particularly important. Here, all framework conditions and possible consequences must be taken into account when shaping the social contract. After all, both the essential principles of subsequent taxation and the liability of the shareholders depend on this. A correspondingly prudent advice by an experienced tax consultant is therefore highly recommended.

We would like to address two starting situations in which the family company can obtain a property for tax purposes.

3.1. The purchase of a property by a family company

3.1.1. The capital of the family company

If high net worth parents want to start a family company to invest money in real estate, the following points have to be considered. First of all, the parents provide the capital intended for purchase to the family company as a loan. From the point of view of the family company, the loan of the parents is therefore available as external capital. Depending on the level of participation by the children, the sum of their deposits constitutes equity. It is often the case that the sum of parental loan and equity is supplemented by a bank loan. This therefore also constitutes debt capital.

3.1.2 Taxation of shareholders’ profits

After the purchase of the property, it should also generate a return – usually in the form of rental income. The profit shares of the individual shareholders are considered individually in the income tax. Thus, each family member can set his own tax allowance, which reduces his profit. Under certain circumstances, this may lead to the fact that ultimately hardly or no income tax is incurred. Interest and similar expenses related to debt capital also helps to minimize the tax. However, this does not apply to the repayment of loans.

In addition to their profit share, parents can also count on income in the form of interest and repayment of their loan. In contrast to the interest, however, the repayment of the loan is not subject to income tax. If the loan agreement is designed accordingly, this connection offers enough leeway to save taxes.

3.1.3. Tax-free sale of the property

Finally, the time may come when the property is to be sold. Here, too, a correspondingly long-term planning pays off right at the beginning of the establishment of the family company. If the property is sold from the company assets only after a period of at least ten years, this can be done tax-free. However, the prerequisite for this is that the family company is in the form of a partnership.

3.1.4. Effects on gift tax and inheritance tax

At this point it should be noted that the establishment of a family company is a particularly effective design variant, with the help of which parents can also transfer larger assets tax-free to their children. Because through the participation of the children, the wealth formation takes place within the family society. Parents therefore do not transfer their property to their children by gift or inheritance. They thus elegantly circumvent the basic requirements for gift tax and inheritance tax.

3.2. Sale of a property of the parents to the family company

If the parents already own a property, then the establishment of a family company can be considered as far-sighted preparation for the most tax-free transfer to the children possible. Due to the fact that the property is now permanently part of the company assets instead of the private assets of the parents after the purchase by the family company, a transfer by gift or inheritance takes place only in the amount of the parental share of the family assets.

4. The Seven Benefits of a Family Society

4.1. Use of multiple tax exemptions

In the current taxation of rental income, each family member participating in the family company can use his own basic allowance of approximately EUR 9,000. Furthermore, the tax burden is only from an income of EUR 54,000 in the range of the top tax rate of 42%. This makes it clear that the higher the number of shareholders in the family company, the more the surplus generated is distributed among these people, each contributing to a significant reduction in the tax burden by using their own tax allowance.

4.2 Save inheritance tax and gift tax

Inheritance tax and gift tax apply only to the share of the parents in the assets of the family company. Depending on the level of participation by the children, this parental share can be reduced to a measure so that the property to be transferred is less than the individual allowance for inheritance tax or gift tax of the children. This aspect also requires forward planning with foresight. However, the financial advantage compared to conventional inheritance or donation is enormous.

4.3. Tax-free sale possible after ten years

Since we assume a family company in the form of a partnership, there is usually no taxation of the profit from the sale of the property. However, this is only possible after a so-called speculative period of ten years has passed.

At GmbH & Co. KG, a special regulation in the social contract is also important for this. We are happy to advise you on your individual design of your social contract in order to take this condition into account.

4.4. Possibilities of limitation of liability

If parents wish to ensure that the children do not bear any financial risks from their participation in the family society, this is possible by choosing the appropriate form of company. The KG offers optimal conditions here, because as limited partners, the children are only involved in liability up to a certain amount. This amount can be set individually. Advice in advance of the establishment of a family company is certainly a great advantage.

Furthermore, parents can also free themselves to a certain extent from the liability risk. For this purpose, a GmbH & Co. KG is set up as a form of family company. However, as a general partner of the GmbH & Co. KG, the GmbH is a corporation whose founding requires a share capital of at least EUR 25,000.

4.5 Possibilities of parental control

By appropriately choosing the form in which the family company is to be founded, parents can set the framework through which they can dispose of the property. For example, as general managers of a limited partnership, they can take over the management of the family company. The children then have the role of limited partners. Your rights within the family company are thus limited to control rights for the annual financial statement.

Furthermore, the managing parents can also determine that the surplus generated by the property is primarily used to repay any loans.

4.6. transfer real estate without real estate transfer tax

Normally, when transferring real estate, there is taxation under the real estate transfer tax. However, there are exceptions to the transfer to their own children. Whether this is done by sale, gift or inheritance, taxation is avoided in this case. In the case of a family company, this should be seen very similarly in the opinion of the Bundesfinanzhof. We are also happy to advise you on this.

4.7 Use of usufruct and right of residence

The sale of a property already in parental property to the family company may also be accompanied by usufruct or a right of residence. This enables parents to ensure that they retain the income generated by the property (e.g. rent, lease) through usufruct. Accordingly, a transfer for own residential purposes is also possible. However, it is important here that these rights also require a notarized entry into the land register.