Tax on inheritance and donation: high rates bring to light the importance of succession planning

Succession planning presupposes that an individual, during the life, may determine (within the established legal limits) how his estate will be passed on to his heirs and successors. Planning allows anyone to distribute all or part of their personal assets when still alive (for natural heirs or not), already a known tool to avoid problems arising from death. In addition, the succession planning deals with the organization of solutions to reduce equity exposure to vulnerability factors, such as judicial discussions that may paralyze the company, or even resolve family conflicts.

One of the items usually present in an inheritance plan is the management of payments due to inheritances and donations, mainly for the tax on causa mortis transmission and donation (ITCMD) and taxes such as Individual’s Income Tax (IRPF).

ITCMD has undergone changes in recent years, so we are bringing a study of its main points. The succession planning can not be aimed at avoiding ITCMD payment, but at organizing the distribution of assets combined with a possible decrease of tax burden.

Tax on Causa Mortis Transmission and Donation (ITCMD)

It is a state tax, present in Article 155, I of the Federal Constitution of 1988, with the wording given by the Constitutional Amendment 3/1993. It can also be called ITCD, ICD or ITD, depending on the state.

Its rate varies according to the state, but is limited to 8 %(Resolution 9/1992, of the Senate). It is noteworthy that there is a permit for the rates fixed by state law to be progressive based on the portion that each heir actually receives.

ITCMD Taxpayers

Beneficiaries who become taxpayers (as a general rule) are:

• In the "causa mortis" transmission: the heir or the legatee;
• In the donation: the donate.

ITCMD Payment Location

The place for tax payment may vary depending on the type of property, as follows:

• Real estate: at the location of the property.
• Movable assets (donation in cash, corporate shares, jewelry, etc.): as a rule, the place where the DONOR resides.

Note: When the donor of an asset located in Brazil resides abroad, the ITCMD is paid in the place of residence of the donor or, in the case of real estate, where the property is located.

 

Rio de Janeiro
Legal act:	Law 7.174/2015
UFIR:	BRL 3.2939
Rate	Values in UFIR	Amounts in R $
4%	Up to 70,000	BRL 230,573.00
4.50%	Greater than 70,000 and up to 100,000	Greater than BRL 230,573.00 and up to BRL 329,390.00
5%	Greater than 100,000 and up to 200,000	Greater than BRL 329,390.00 and up to BRL 658,780.00
6%	Greater than 200,000 and up to 300,000	Greater than BRL 658,780.00 and up to BRL 988,170.00
7%	Greater than 300,000 and up to 400,000	Greater than BRL 988,170.00 and up to BRL 1,317,560.00
8%	Greater than 400,000	Greater than BRL 1,317,560.00

 

Sao Paulo
Legal act:	Law 10,705/2000
UFESP:	BRL 25,70
Rate:	4%

Note:

The legislation of both States provides for situations in which the taxpayer is exempt from the tax. Within the role of both, the donations of real estate with exemption from ITCMD have a maximum limit.

In RJ, the causa mortis transfer of residential real estate that does not exceed the equivalent value to 60,000 UFIR to individuals is exempt. In turn, SP legislation indicates that the donation transmission in value corresponding to up to 2,500 UFESP receives exemption from collection. Changes in ITCMD

In recent years, many States of the Federation, which did not apply the maximum rate of ITCMD, began to approve changes to increase the tax. Rio de Janeiro was one of the last states to increase the rate to the limit of 8% (through the Law 7,786/2017), which was applied from 2018.

In São Paulo, the Law Project 1,408/2015 is going through, proposing the creation of progressive tax rates for taxation to inheritances and gifts, as in Rio de Janeiro and other states, as well to increase the rate from 4% to the progressive rate from 3% to 8%.

While the states establish new ways for collecting ITCMD, the Amendment Proposal to the Constitution (PEC) 96/2015 is pending in the Senate. It aims to empower the Union to institute the tax on Great Inheritances and Donations (IGHD), in order to tax, at federal level, the assets and rights causa mortis transmission, and donation of high value. The IGHD would be progressively applied and would only achieve high value inheritances and goods, which the maximum rate would not exceed the maximum rate Individual Income tax (IRPF), currently 27.5%.

Equity holdings

Given this increasing ITCMD tax rates scenario, the possible creation of the IGHD, not mentioning another discussion that deals with a possible creation of a Value Added Tax (IVA), there is a growing interest in precautionary mechanisms and structuring a succession planning through creation of equity holdings.

The equity holding concentrating all or part of the same assets’ family (also known as family holding company), and it is an important succession and tax planning tool, as well as it allows the establishment of succession standards through the legal entity, facilitates the assets management, it also allows significant tax advantages. This is the opening of a company under which the assets of the family will be placed, encompassing financial assets, equity interests in companies and real estate.

Among the tax benefits of opening a holding company, we can highlight the most advantageous taxation of IR on rent receipts (comparing to an individual), the possibility of non-payment of ITBI (Tax on Transmission of Real Estate Property) and Income Tax on the capital gain on transfer a property from an individual to the holding company, ITCMD calculation based on social quotas and not on the market value of the property in case of opening an inventory.

Creating rules is possible in the management of assets for its protection, such as: prediction of how the management will be in the absence of the founder, determination of how will be the sharing, definition of a lifetime usufruct clause, anticipation of inheritance, etc.

Note that the costs are necessary for the establishment and maintenance of these holdings vary according to their size, but are usually less than the cost related to a judicial procedure to regulate a company succession.

Tax advice

It is important that you have tax consulting services from professionals with solid knowledge. As well as tax planning, which is also important to reduce tax burden and optimizing company results, a succession planning is an extremely necessary measure for those who are seeking a better way to ensure the conservation and perpetuation of their family assets.