What if: DGA dies with debt to BV
The Excessive Borrowing Act is currently a hot topic. Many directors and major shareholders are currently mapping out with us what the debt to their own PLC is and whether action needs to be taken here. This is because on December 31, 2023, it will be examined whether you as a director and major shareholder and your tax partner (and related persons) do not have more than € 700,000 in debt to your PLC. If you do, the excess will be taxed as income from substantial interest (box 2). But what happens to the debt if the dga dies unexpectedly?
Because of death, there is no longer a substantial interest at the end of the year and the debt is deemed to have been repaid in full prior to the time of death. Now you may think that this solves the problem regarding excessive borrowing. But how is the debt with you or your heirs then processed? What are the implications for the Excessive Borrowing Act upon the death of the DGA?
There is no single answer to these questions because it depends on the specific situation: whether or not there is a will, the amount of the debt, the number of heirs, etc. This makes it more complicated for someone who does not deal with this on a daily basis. We will explain all this and of course our specialists are at your service!
To keep things clear, the following case is always the starting point: A and B are married under a prenuptial agreement. A is the sole shareholder of BV X. They have two children. A has borrowed € 1.2 million from BV X. This is not an owner-occupied home loan. A also has € 5 million in private assets.
Inheritance
At the end of 2023, A dies suddenly, without having a will. As a result, the legal distribution applies. That is, the partner (B) inherits all assets and debts from the estate and the two children receive an interest-bearing claim against B in the amount of their child's share.
Checkout
Before the death, A still had a debt with X BV that was higher than the limit amount of €700,000. Because the reference point is December 31, 2023, and A died before this date, A does not have to settle in box 2. For the heir(s), however, this is a different story. As stated above, B inherits all assets and debts after A's death. At the reference moment of December 31, 2023, B is therefore a substantial interest holder or director and major shareholder of BV X. Since the debt at that time is higher than € 700,000 (namely € 1,200,000), the excess part, € 500,000, must be settled. Had A still been alive, he would also have had to settle in 2023 over the notional regular benefit of € 500,000.
Last will and testament
Now suppose that A had drawn up a will in which his will was expressed and this provided that not everything would pass to the longest living person, but provided that B and the children would each inherit equal shares. As a result, each would inherit 1/3 of the assets and debts. Thus, the children also become substantial interest holders, or dga, and they do not have to settle on a notional regular benefit. In fact, the debt that accrues to them independently is less than €700,000, as they each obtain 1/3 of the debt which amounts to €400,000.
Death in 2024
Suppose A dies not in 2023 but in 2024 (without a will). That changes the whole situation and makes it a lot more complex. This is because in the 2023 income tax return, A included a notional regular benefit of €500,000 in box 2. Due to death in 2024, A no longer has a substantial interest in 2024 and also no debt on Dec. 31, 2024. As a result, a negative notional regular benefit of €500,000 may be included in the death declaration, the so-called F-bill. This loss can be set off, according to the loss relief rules, against profits enjoyed in 2024 or rolled back to previous years.
For B, however, this means that a notional benefit of €500,000 must be declared in Box 2 regarding B is a substantial interest holder on December 31, 2024 and the debt is above €700,000.
Due to a statutory provision, effectively no tax is due in Box 2 before 2024. This is because substantial interest income is a joint income component for tax partners. If one has a positive regular benefit and the other a negative regular benefit in Box 2, this can be offset.
Equal parts
If A did choose to make a will during life in which it is again stipulated that each inherits equal shares, the situation becomes somewhat different. Each inherits 1/3 of the substantial interest and of the other assets. But each also inherits 1/3 of the debt to BV X (€ 400,000 per person). All heirs are independently liable for tax under the Excessive Lending Act if the debt individually exceeds €700,000. Thus, they will not face a notional regular benefit in Box 2 in 2024.
But how does this work out for A and B since they can still be considered tax partners in 2024? And suppose there is a loss to be offset in Box 2 now that remains outstanding in the future, which can no longer be offset? You don't want any tax surprises in the future, do you? Our specialists are ready to deal with the outstanding questions with you.
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