THE BENEFITS OF SPLITTING OWNERSHIP INTO USUFRUCT AND BARE OWNERSHIP
When purchasing a property, splitting the ownership between a bare owner and a usufruct holder can facilitate the future transfer of the property. When the usufruct holder dies, his or her right to use the property and earn the income from it is automatically carried over to the bare owner, who thus takes over the full ownership with no inheritance tax to pay.
Démembrement, or splitting the ownership of a property, consists of dividing the ownership rights into two separate elements to be held by a usufruct holder and a bare owner.
• usufruct is the right of use and enjoyment of the property, i.e. the right to use it and earn the income from it (Article 578 of the French Civil Code). In the case of house or flat, that means the right to live in it or to rent it out. The usufruct holder has no power to sell the property. He or she must look after it, keep it maintained and pay the tax on it (such as the taxe foncière or ISF wealth tax);
• bare-ownership is a right of virtual ownership. For example, the bare owner of a property has no right to occupy it or rent it out. On the other hand, when the usufruct holder dies, full ownership of the property is carried over to the bare owner without any liability for inheritance tax. He can then dispose of it (by sale, gift, bequest, etc.) as he wishes.
The maximum duration of usufruct generally corresponds to the usufruct holder’s lifetime – in that case, it is called usufruit viager, or life usufruct. But it is possible to set a predefined term (10 years, for example), which is called temporary usufruct.
Buying a property and splitting the ownership is particularly advantageous from a tax point of view: when the usufruct holder dies, full ownership automatically carries over to the children – who already own the bare title – without paying any tax (Article 1133 of the French Tax Code).
However, bare-owners must be able to prove that the purchase was paid using their own money. Otherwise, the tax authorities consider that the real owner is in fact the usufruct holder (from a tax point of view) and they could demand the integration of the property’s full ownership value into the usufruct holder’s estate (Article 751 of the French Tax Code). If that happens, the bare-owner would have to pay inheritance tax on the full value of the property. This presumption aims to avoid situations where the usufruct holder pays for the property in full, with the fraudulent aim of advantaging the bare-owner.
But this presumption is not absolute and it will be set aside if the children can prove that they really did pay for the bare-ownership (by taking a bank loan repaid using their own income).
In reality, it is common for parents to gift to their children the funds used to fund the purchase. In such a case, the presumption will be set aside if 3 conditions are satisfied:
• that the exact date of the gift can be established, which will be case if the gift is recorded by a notary or in a registered instrument,
• that the final deed of sale is signed more than three months before the death of the usufruct holder,
• that the final deed of sale mentions the source of the funds, i.e. from a gift (article 751 of the French Tax Code).