Buying usufruct – Right of Use on Spanish properties

The Usufruct in Spain: A Legal Strategy to Reduce Inheritance Tax

When purchasing real estate in Spain, it is often advisable to explore different financial and legal strategies to minimize future tax obligations. Many clients seek guidance on how to reduce or avoid Spanish inheritance tax. One of the most effective and commonly used solutions is the legal division of property through usufruct and bare ownership.

 

Understanding Spanish Inheritance Tax

As established in our dedicated inheritance section, property located in Spain is subject to Spanish Inheritance Tax. It is therefore crucial to assess options during the acquisition phase that may help mitigate or avoid this tax in the future.

 

What Is Usufruct in Spain?

Usufruct is the legal right to use and enjoy a property without owning it outright. The full ownership of a property is split into two distinct rights:

  • Usufruct: The right to use, occupy, and enjoy the property.

  • Bare Ownership (Nuda Propiedad): The right to the title of ownership without possession or use.

 

This division allows one party (typically the parents) to retain the right to live in or rent the property, while another party (usually the children) holds the bare legal title.

 

Legal Consequences of Usufruct

A usufructuary has exclusive rights to the property:

  • The property cannot be accessed, rented, or sold by the bare owner without the consent of the usufructuary.

  • The usufructuary may live in the property or rent it out as if they were the full owner.

 

Common Use Case: Parents and Children

It is very common for parents to purchase a property and:

  • Acquire the usufruct (typically valued at 30%)

  • Assign the bare ownership to their children (typically valued at 70%)

 

This allows the parents to retain exclusive use during their lifetime, while the children become full owners upon the parents’ death without paying inheritance tax on the usufruct portion.

Example:

  • Parents acquire 30% usufruct

  • Children acquire 70% bare ownership

Upon the death of the usufructuary:

  • The usufruct is extinguished

  • Children automatically become 100% owners

  • The transfer of the usufruct is exempt from inheritance tax

 

Tax Implications at the Time of Purchase

At the time of purchase:

  • Parents pay Property Transfer Tax (ITP) on the usufruct portion only

  • Children pay ITP on the bare ownership portion

 

After the death of the parents:

  • Heirs are not subject to inheritance tax on the usufruct value

  • However, they must pay the pending transfer tax on the portion of the property previously covered by the usufruct, which becomes full ownership

 

Buying a Property in the Children’s Name

Many clients consider purchasing the property directly in the children’s name. While this is legally possible, it raises important issues related to the source of funds:

Donation Tax Risks

In Spain, the buyer must be the party who pays for the property. If the parents pay but the children are registered as owners, this is legally considered a donation, which is taxable.

  • Donation tax in Spain is comparable to inheritance tax

  • If not structured correctly, families risk high donation tax liabilities

 

How to Avoid Donation Tax in Spain

To avoid donation tax, parents should formalize the donation in their home country. The following steps are essential:

  1. Visit a public notary in your home country

  2. Execute a donation deed specifying the amount donated for the purpose of purchasing a property in Spain

  3. If the child is married under a community property regime, the spouse must also sign to confirm the donation is for individual (non-marital) use

  4. The deed must:

    • Include an apostille (Hague Apostille)

    • Be translated into Spanish by a certified translator

 

Transfer of Funds and Documentation

Once the donation is formalized:

  • Parents transfer the funds to the child’s personal bank account

  • All payments related to the property purchase must reflect each buyer’s proportional share

 

Required Documentation for the Notary in Spain:

  • Original donation deed with apostille and official translation

  • Marriage contract (if applicable) with apostille and translation

  • Copies of all bank transfers made by each buyer

 

Proportional Expenses

  • All related taxes and expenses (e.g. notary, registration, transfer tax) must be paid proportionally by each buyer according to their ownership percentage

 

Conclusion

Using usufruct and bare ownership is a legally effective and commonly accepted method in Spain to reduce inheritance tax liability. Likewise, purchasing property directly in a child’s name is possible but must be carefully structured to avoid unintended donation tax consequences. Professional legal advice is essential to ensure the transaction complies with Spanish tax and inheritance laws and protects the family’s interests.