Inheritance and gifts: straightforward, but not necessarily tax-efficient

The most common ways of transferring real estate are inheritance and gifts. From a duty perspective, however, these options are not necessarily the most favorable. Under Act XCIII of 1990 on Duties (the “Duty Act”), where the acquirer is not exempt from duty:

• the acquisition of residential property is generally subject to a 9% inheritance or gift duty;
• the acquisition of other real estate is generally subject to an 18% inheritance or gift duty.

In the case of high-value real estate, this may result in a significant financial burden. A gift differs from inheritance in an important respect: ownership can be transferred to the recipient during the donor’s lifetime. From a duty perspective, however, a gift does not in itself provide a more favorable solution.

What about a trust?

A trust structure may also be considered as an alternative. Its primary purpose, however, is not to reduce transfer taxes or duties, but rather to provide for the long-term management of assets and their regulated transfer or distribution to beneficiaries. The duty treatment of a trust is relatively complex. The transfer of assets to the trustee may, under certain conditions, not trigger gift duty. The beneficiary’s subsequent acquisition of the assets must nevertheless be assessed separately under the applicable duty rules. Therefore, a trust cannot in itself be regarded as an automatic tax or duty optimization tool. The specific structure and the legal basis of the eventual transfer must be examined on a case-by-case basis.

Maintenance agreements: transferring property in exchange for care and support

A different approach may be taken in the case of a maintenance agreement. Under Sections 6:491–6:497 of the Hungarian Civil Code, a maintenance agreement requires one party to provide appropriate support and care to the other party and, where necessary, nursing and other services specified in the agreement.

In return, the person entitled to maintenance may, depending on the terms of the agreement, transfer ownership of real estate to the other party. The key characteristic of this arrangement is that it is an onerous contract. In other words, the transfer of the property is not gratuitous: the consideration for the transfer is the obligation to provide maintenance and care.

Why is it considered an aleatory contract?

A maintenance agreement may also be regarded as an aleatory, or “chance”, contract. This is because, when the agreement is concluded, neither party can know precisely how long the maintenance obligation will last or what the ultimate value of the services provided will be. For example, it cannot be known in advance:

• how long the person entitled to maintenance will live;
• how their health condition will develop;
• what level of care or nursing they will require; or
• what overall burden these obligations will place on the person providing the maintenance.

The final economic value of the parties’ respective performances therefore cannot necessarily be determined at the time the agreement is concluded.

Why is the 4% duty rate important?

The onerous nature of a maintenance agreement is particularly significant from a duty perspective. Under Section 20(4) of the Duty Act, acquisitions based on a maintenance agreement, life annuity agreement or inheritance contract are subject to the rules applicable to duty on onerous transfers of assets. Under the general rules, the duty payable on the acquisition of real estate is:

• 4% up to a market value of HUF 1 billion;
• 2% on the portion exceeding HUF 1 billion;
• with a maximum duty of HUF 200 million per property.

This may be substantially more favorable than the 9% duty applicable to residential property acquired by inheritance or gift, or the generally applicable 18% duty on other real estate.

The limits of duty optimization

The lower duty burden does not mean that a maintenance agreement can simply be created for the sole purpose of reducing the duty payable. There must be a genuine maintenance, care or other contractual obligation corresponding to the nature of the agreement, and the parties must actually perform the obligations undertaken under the contract. It is therefore not sufficient to enter into an agreement formally described as a maintenance agreement if the parties’ actual intention is merely to avoid or reduce the duty payable.

When assessing the legal transaction, the actual substance of the relationship between the parties, rather than merely the title or formal wording of the agreement, is therefore of fundamental importance.

Inheritance contracts: a similar duty advantage

An inheritance contract may also provide a favorable duty treatment. Under an inheritance contract, the deceased person establishes an inheritance relationship in favor of the other party in return for maintenance, a life annuity or another appropriate form of consideration. The Duty Act likewise subjects acquisitions based on an inheritance contract to the rules applicable to duty on onerous transfers of assets. Accordingly, provided that the statutory requirements are met, the 4% rate – and the 2% rate applicable to the portion exceeding HUF 1 billion – may also apply to acquisitions under an inheritance contract.

Which structure may be the most favorable?

Where the objective is to transfer real estate to a person who is not exempt from duty, a maintenance agreement or inheritance contract may, from a purely duty perspective, be more favorable than a straightforward inheritance or gift. The crucial point, however, is that the lower duty burden can only be legitimately achieved where the chosen legal arrangement reflects a genuine legal and economic relationship corresponding to the nature of that arrangement. The choice of the appropriate structure should therefore not be based solely on the amount of duty payable. The parties’ actual intentions, the obligations arising from the agreement, the legal status of the property, and the broader tax and duty consequences should also be taken into account.

Overall, a maintenance agreement or inheritance contract may provide a more favorable duty treatment, but only where the substance of the arrangement genuinely corresponds to the legal institution being used. Duty optimization alone does not provide a legal basis for applying the more favorable duty rules.

When transferring a high-value property, the key question is not only under which legal title the property can be acquired, but also what tax or duty consequences arise from the chosen legal arrangement. This is particularly relevant where the acquirer does not fall within the scope of persons exempt from inheritance or gift duty. This raises an important question: which legal arrangement – inheritance, gift, maintenance agreement, inheritance contract or trust – may result in the lowest duty burden?

Notice: This article does not constitute legal advisory services, and does not necessarily match the interpretation of the applicable laws by the authorities. This article is for general information only.

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