Some considerations when buying a second home abroad

Naturally, several questions then arise: (1) From a tax point of view, is it best to buy as a private individual or through a company? (2) do you have to use your own funds or can the purchase be financed? and (3) what about the transfer to your future heirs? 

We will briefly go over the key considerations for each of these questions below. These can be explained in more detail during a personal meeting if you wish. Should you be interested in this, please get in touch with your private banker.

When investing in real estate abroad, you should always bear in mind that you are not only liable for tax in Belgium (since you remain a resident for tax purposes), but that – as far as your holiday home is concerned – you will also be subject to tax in the country where the property is located. To avoid double taxation, Belgium has concluded treaties with many countries. Broadly speaking, this means that the country where your holiday home is located will be the only country that can impose taxes. It is therefore highly recommended to seek advice from a local tax consultant, as he or she can take all the applicable administrative obligations into account. Of course, these vary from country to country, as do tax rates, exemptions, etc. 

Please note that in Belgium it is mandatory to declare a home you own abroad, but it will not be taxed. 

1. You buy the home yourself in your capacity as a private individual. 

In previous articles from 2021 and 2022, we already pointed out that you must take timely action to apply for a Belgian "cadastral income" (CI) for your new holiday home. As mentioned, this CI will have to be included annually in your Belgian personal income tax return, but will ultimately be exempt from tax subject to the progression rule. Briefly put, this is a mechanism that creates a multiplier effect for the average tax rate applicable to your other income. The good news, however, is that the interest you paid on a loan you took out to purchase your dream home is deductible from the total amount of your (other) real estate income. If you do not have other real estate (for example, a second residence in Knokke), the impact of the progression rule can be limited by the interest relief. 

2. You purchase through your company. 

In some cases, a holiday home abroad is purchased through a Belgian company. In terms of taxation, the general principle remains the same, namely that the property abroad will be taxable in the country where it is located and Belgium grants an exemption. 

Please note that in addition to Belgian accounting rules, accounting obligations may also arise abroad. You will, of course, also be subject to local corporation tax in the foreign country in question (and will no longer be taxed as a private individual). Although the rules vary from country to country, it can be expected in this scenario that more tax relief options will be available (depreciation, financing costs, maintenance and repair costs, etc.). The rates will also be different than if you had purchased the property as a private individual. Be sure to discuss all this with your local adviser. 

What may be an issue from a Belgian tax point of view is that you will be charged a benefit in kind for the cost-free use of the holiday home (which is owned by your company). In other words, an additional tax liability taxable as earned income in Belgium.

Once you have decided to purchase the property privately or through your company, the question arises as to how the purchase will be financed. Will you use available assets for this, or will it be necessary – or perhaps more advantageous – to take out a loan? 

Experience has shown that external financing of purchasing a dream home can be a complex process, as Belgian banks tend not to readily accept a home abroad as security for the credit. At ABN AMRO, however, it is possible to use your securities portfolio held with the bank as collateral for the loan (Lombard loan). The collateral value of your securities portfolio will depend on its composition. For example, individual shares may have a 'loan-to-value ratio' of roughly 60%, which means that they can be used to secure credit up to 60% of their market value. 

In cases like these, ABN AMRO usually offers bullet loans, which means that only interest is paid during the term, and the principal is only repaid on the maturity date of the loan. The loans can be extended depending on the customer’s personal situation and market conditions. 

Benefits of securities-backed financing 

A major advantage of financing real estate investments with a securities portfolio is that your portfolio remains intact. Transactions within the portfolio remain possible as long as the hedging requirements are met. In addition, there are no notary fees and the cost of the loan is generally lower than the expected return on the portfolio.

There may, in principle, also be double taxation in the event of a gift or inheritance of real estate abroad, both in Belgium (as the place of residence of the donor/testator) and abroad. However, in the absence of relevant treaties (with the exception of the treaty with France), Belgian legislation makes provision for the avoidance of double taxation as much as possible. 

Generally, when gifting real estate located abroad, only foreign taxation applies. Belgian legislation explicitly states that such gifts are free of gift tax. Please note that this exemption only applies to real estate. If you own the shares in the real estate company, this exemption does not necessarily apply and may therefore result in double taxation. 

If your holiday home passes to your heirs through inheritance, the inheritance tax due abroad may be deducted from the inheritance tax payable in Belgium. The part of the credit not repaid may also form a deductible item in the foreign country in question in the composition of the estate to be taxed there. 

Please note that if any donee/inheritor lives abroad, they may also have to pay gift/inheritance tax there. Timely planning is therefore essential. The time of purchase of your second residence is probably a good time to plan for this.