On 1 July 2024, the Government presented a consultation draft for a new bill that intends, among other things, to facilitate the opportunities for generational change of family-owned businesses that rent out real estate. If these rules are adopted, generational change of this type of business can take place in the future with tax succession without triggering capital gains tax in certain cases. The new rules are expected to enter into force from 1 January 2025. At the same time, the estate and gift tax is expected to be reduced from 15% to 10% with effect from 1 October 2024. Read on below or contact us for a non-binding discussion if you want to know more about the new generational change opportunities that are on the way
Introduction to the current rules
Under certain conditions, it is possible to transfer companies and personally run businesses with tax succession within the close family circle and to certain employees. Transfer with tax succession means that no capital gains tax is triggered at the time of the transfer. Instead, the transferee takes over the transferor's tax position, including with regard to the acquisition price. The taxation of any profit is deferred until a later date when the acquirer relinquishes the shares in the company or the company.
The possibility of tax succession eases the need for liquidity in the event of a generational change, as it might otherwise be necessary to sell the business or take on debt to finance the advance tax triggered by the transfer.
Access to tax succession is conditional on the company or the business being transferred not having the character of a so-called "money tank". The purpose of this is, among other things, that there should only be access to tax succession if there is a generational change of genuine business enterprises and not a transfer of assets in general.
As the rules are today, it is not possible to transfer the succession of rental companies or real estate companies that predominantly engage in the rental of real estate with tax succession. This is because the letting of real estate is considered "passive capital investment" according to the money tank rule on an equal footing with e.g. cash and securities.
New succession opportunities for owners of rental properties on the way
With the new rules, it is proposed, among other things, to put personally owned real estate companies and real estate companies that are active in the rental of real estate on an equal footing with other businesses in relation to the money tank rule, so that it will be possible to carry out generational change with tax succession. In other words, the letting of real estate in some cases transitions from being a passive investment of capital to being an active business.
This is a breakthrough in relation to the current legislation in the area.
The application of the new rules requires that a number of conditions are met. Among other things, it is a condition that there is an "active letting business" with real estate.
Requirement for active rental business
According to the consultation draft for a new bill, it is considered an active rental business if the following three conditions are all met:
- Ownership: More than 50% of the property is owned. When calculating the ownership interest, ownership shares owned directly or indirectly by members of the ultimate owner's close family circle are included. This means that there is a possibility of generational change, even if the controlling ownership share is distributed among several family members. It also allows for smooth generational change, where the entire company is not transferred at once.
- Key tasks must not be entrusted to an independent third party: The task of concluding lease or lease agreements or other agreements of significant economic importance for the operation of the rental business, e.g. agreements on reconstruction or significant maintenance work, must not be entrusted to an independent natural or legal person who habitually enters into the agreements or usually plays a decisive role in the conclusion of the agreements.
This condition will not be fulfilled even if the Owner formally signs the Agreements, if the content of the Agreement has been negotiated by an independent third party on behalf of the Owner. This assumes that the owner's approval by signing is done without any substantive changes to the agreement negotiated by the independent third party. Thus, the owner's signature becomes just a matter of form.
It is not an "independent third party" if the agreements are concluded or negotiated by employees of the rental company or employees of another company or business with the same ownership.
- Requirements for length of ownership and duration of rental activity: The property has been owned for a minimum of 1 year and has been actively rented throughout the ownership period (or that the property is part of an overall business with active rental of real estate that has been owned for at least 1 year).
If the above conditions are met, the rental business can be transferred with tax succession both alive or on death, and regardless of whether the business is owned under personal auspices or operated in the form of a company. Of course, provided that the other conditions for succession are met.
If the transfer is made by inheritance or gift, it will also be possible to make use of the proposed reduced estate and gift tax of 10% and the proposed rules on legal claims for a schematic valuation if the conditions are met. These new rules, which are also aimed at easing succession planning in Denmark, are expected to take effect from October 1, 2024.
Read our article about the proposed rules: Generational change: New rules on the way - significant relaxations
The value resulting from the use of the schematic valuation must also be used when calculating the liability items in the event of a transfer with succession. A reduction in valuation on the basis of the latent tax burden assumed by tax succession must not exceed the liabilities.
CLEMENS notes
For many years, the lack of access to generational change with tax succession has been a condition that has made it difficult to transfer the generation of rental companies.
If the draft bill is adopted, the legal position will change significantly. We expect that this will be closely studied by many family-owned rental companies, and that there will be a large number of generational changes in the coming years, when hitherto difficult transfers can be carried out.
This may also give rise to family-owned rental companies in the future to a greater extent insource administration tasks in order to become active rental companies.
See how we can help you with tax law.
Are you or your customers facing a generational change of business with rental of real estate?
At CLEMENTS, we follow the further legislative work with regard to the proposed relaxations of the possibility of generational change of rental properties. Overall, this indicates that the generational change opportunities for owners who are engaged in the rental of real estate will be significantly improved – compared to current law.
At the same time, we at CLEMENS have in-depth experience with all aspects of a generational change – regardless of the type of business – as well as specialist knowledge in the related tax-related areas. We can therefore safely follow you safely through the process all the way from the initial considerations to the completion of the transaction.
Contact us for a non-binding discussion about easier access to generational change in the rental industry
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