Preparing to pass on what you have built and accumulated during your lifetime to the next generation – with as few tax and legal obstacles as possible – is one of the most important decisions in life. The topic has long attracted the attention of popular culture – from the HBO series Succession to Bugs Bunny cartoons. This alone shows that sooner or later, the question becomes relevant to everyone. In my practice I encounter it frequently, and I have recently come to several conclusions that I would like to share with you.
First, what is the current situation with inheritance taxes in Latvia?
It’s better to give as a gift
If you need to leave anything other than real estate to close relatives or your spouse (partner), it might be more profitable to give it as a gift before leaving for other hunting grounds – in that way, you don’t have to pay the notary fees for confirmation of inheritance law mentioned in the table above. Gifts to relatives and spouse (partner) are also not subject to personal income tax (PIT).
But how to predict X hour?
It turns out that there is no need to predict, even if it were possible for someone or if you trust your local fortune teller. At least when transferring a business to heirs, there are good solutions that do not require expensive consultants or even complicated trust or fund schemes in Switzerland, Liechtenstein or Guernsey. Regarding foreign structures, I definitely recommend not relying on recommendations but taking professional advice, because managing foreign structures from Latvia will definitely create tax risks in Latvia.
For example, if the testator, together with the heirs, manages a business structure in a Latvian partnership, then it is possible to draft the partnership agreement in such a way that nothing significant changes in the business after the death of one of the members. The agreement can also stipulate a number of other important conditions – flexible profit distribution mechanisms, management structure, even the age at which the son can receive dividends, ensuring he does not gamble it all away in the casino until then, etc.
Prefer a will or contract for real estate transfer
For this purpose, another table is needed. Here we see that transferring real estate to heirs by will or contract could have the lowest state fees for registering the property in the land register.
Lower PIT if the heir later sells the inherited property
The method of transferring inheritance by will or contract could have another advantage. Until now, in real estate transactions, there has been a short-sighted tendency to indicate a reduced transaction value in order to have a lower state fee. However, those who can look at the bigger picture have calculated that with a reduced purchase value, the taxable base for PIT increases when the property is eventually sold.
Therefore..
Where can we agree on values?
It seems to me that in the case of a gift of real estate, there are anti-avoidance norms of the Personal Income Tax Act. Namely, if relatives or a spouse who received real estate as a gift sell it within 5 years, then the purchase value should be considered the price at which the donor acquired this real estate. However, there are no such special norms for other property. It seems that in testamentary and contractual transfers, the parties are also free to agree on the value, as long as it is not recognized as illegal by general anti-avoidance norms (with the sole purpose of reducing the tax burden). Therefore, the parties could have exactly the opposite pull – to increase the value at which the heirs acquire the property (within reason, of course).
