Is it possible that something called a “usufruct” could save you money? This is a little known part of civil law that is worth knowing if you own property.
If you (or a member of your family) owns property, you may find a usufruct could save you money. In this article, we’ll explain how it can have particular advantages for Inheritance Tax.
Let’s start by defining a usufruct. It means the legal right to use and derive income from someone else’s property. The Wikipedia page on usufructs explains the derivation:
- Usus (use) is the right to use or enjoy a thing possessed, directly and without altering it.
- Fructus (fruit, in a figurative sense) is the right to derive profit from a thing possessed: for instance, by selling crops, leasing immovables or annexed movables, taxing for entry, and so on.
Although a usufruct allows you to use someone else’s property, there are some rules. You ARE allowed to make a profit (a fructus) by:
- Leasing it
- Selling crops produced by it
- Charging admission to it
However, a usufruct is NOT the same as owning the property outright. The owner of the property can do most things to it. In particular, you (as the beneficiary of the usufruct) CANNOT:
- Consume the property
- Damage the property
- Dispose of the property
- Destroy the property
- Transfer ownership of the property to anyone else
There are sometimes variations of usufruct that affect these rules. For example, something called an “imperfect usufruct” allows the beneficiary to make certain alterations or improvements to the property. Even so, the improvements would still belong to the original owner at the end of the usufruct.
In addition, usufruct is usually only in place for a limited time. This often ends when the owner of the property dies. As such, it can have some advantageous effects on Inheritance Tax (see below).
How Does Usufruct Work?
People often use a usufruct in times of ill health. If a friend of family member is too ill to run their pub/farm/cafe, they could grant you usufruct. You would run and manage the property for the duration of the usufruct.
At the time of their death, you can dispose of the property through the normal channels.
This is helpful for Inheritance Tax purposes. If the property has a usufruct, it will usually not be treated as a settlement for Inheritance Tax purposes. Instead, it will be treated as an interest in possession trust.
Usufruct – The Next Steps
If you think a usufruct could be helpful in your situation, it’s best to contact a property lawyer or an accountant with specific expertise in this area.
If you’d like to discuss how a usufruct could save you money, please get in touch. We are experts at helping individuals and small businesses arrange their affairs in the most tax efficient way.
We also have close relationships with a number of superb property lawyers and would be happy to make the introductions.