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“Usufruct” in Spain – Right to use the property

“Usufruct” in Spain – Right to use the property 300 251 TLA

“Usufruct” in a property ownership is the right to use and benefit from a Property not being the owner. It is like being the tenants but not paying any rent.

So,  the owners of the property are different people from the user. This kind of owners is named “Nude owners”.

The “Nude owners” are those who have the ownership of the property. But they cannot “use” the property, nor to “live” at the property, nor to “rent” the property, as this right is given expressly to the “usufructers”. In fact, the Nude owners may have not right to “access” to the property if the usufructairies do not allow them to.

The “usufructuaries” are those who have the right to “live”, “rent” and “use” the property, and even block the access to the “nude owners”, in case they wished to.

Let us explaining you better this concept in the following way:

The legal “ownership” right on a property is composed by a group of legal rights like:

  • To limit the Property (for example, with a right of way)
  • To use the Property as guaranty of a debt (a mortgage, for example)
  • To rent the Property
  • To use and benefit from the Property

Mainly, there are 2 types of usufructs:

  • “Temporary”  or ” Conditioned”: When the use of the Property has a deadline on time or is conditioned.
  •   For life: When the use of the Property is for the life time of the user.

Usufruct comes from the Roman Laws and it’s quite common in inheritance process and family law in European continental countries like Spain, France, Portugal, Germany, etc.

In inheritance process, is quite common from the testator to leave the usufruct of the permanent home to the surviving spouse, leaving the rest of the Property ownership to the children (Nude ownership). In this way, the deceased part makes sure that the surviving spouse will have a place for living in spite of eventual conflicts with the children.

Also, the usufruct has been widely used in property transactions in Spain, with the aim to avoid,  or to reduce, Spanish inheritance tax. It is quite common from parents to buy the Property on the name of the children, keeping the right usufruct for their selves. In this way, if the buyers only buy the “usufruct” and the children acquire the “nude ownership”, in case of death of the parents, the children would have to pay only the inheritance tax for the value of the “usufruct”, as they are already the owners of the rest.

Let us explaining this to you with an  example, if the Property Price is 200.000 EUR and the parents kept the usufruct valuated in 50.000 EUR, and the children acquired the ownership of the rest (150.000 EUR), then, in case of death of the parents, the inheritance process will be only for the 50.000 EUR. Obviously, this action reduces significantly the inheritance tax.

 But, this system must be studied carefully due to recent interpretations of laws, because, the decision of the parents to translate the “nude ownership” to the children, can be considered as a “Donation” and then paying taxes as an action of “Donation”. And “Donation taxes” may be in Spain even higher than “Inheritance Tax”. A way to avoid this would be the children paying by their own and from their own sources the price of the “nude ownership”. But, due to the fact that this is a very delicate point with important tax implications, it is highly recommendable to take legal advice prior to take these decisions on Usufruct.

WHAT IS THE VALUE OF THE USUFRUCT? – How can we calculate the value of the Usufruct?

The value of the usufruct is calculated in the following way: You need to make the following calculation: REST to number “89” the age of the user (if there are 2 users, the age is the one of the youngest), with a minimum of 10 %.

For example:

EXAMPLE 1: Acquisition of the Usufruct on the purchase process:

“A”+”B” have two children (“1″and “2”). “A” is 69 a “B” is 72. They have both decided to buy a house in Spain, for a price of 200.000 EUR. In the process of acquisition, so before completing the sale, and with the aim to  reducing inheritance taxes in the future,  they instruct to their solicitor that they want to keep the usufruct and leave the rest of the ownership rights to their children.

Value of the usufruct: 89 – 69 = 20.

20 is the % from the total price of the property, with the following formula:

200.000 * 20 % = 40.000 EUR. This is the usufruct value of the property and the “amount” of price that A+B would be responsible for.

In the same way, the children keep the rest of the property rights valuated in 160.000 EUR.

Following this example, if A+B die, then, children will receive the 40.000 EUR automatically, consolidating the 100 % of the ownership, and paying taxes only on the 40.000 EUR.

As 1+2 got the ownership rights on a “Purchase process”, then they will pay “Purchase or Transfer Tax” for the value of the ownership. So, they will not pay “inheritance tax” but “transfer tax”.

EXAMPLE 2.- Acquisition of the Usufruct via testament/inheritance:

In the previous example, A+B bought the Spanish property 100 % by their own. They keep the property all their lives on their names only, and they decide to pass it to the children via inheritance.

In this way, A+B make Spanish Wills and indicate the following:

  • If “A” dies, the A part of the property will be distributed the following way:
    • “B” receives the usufruct of the “A” part of the house
    • The children receive the rest of the ownership right of the property (“Nude ownership”)
  • If “B” dies, the same.

In this case, taking the example that “A” dies, the usufruct from its part will be transferred to “B” and the nude ownership will be transferred to the children. And this will be done executing the last “A” Will in a Spanish inheritance process.

Later on, when “B“ dies, 1+2 will receive the usufruct of the property via also inheritance.

In this example, as 1+2 were receiving the usufruct via inheritance, then, they will not pay “transfer tax” for this acquisition. They will pay “inheritance tax” for a value of the usufruct of 40.000 EUR.

As always, please, note that each case must be studied in particular and can be totally different one each other, so, this report cannot be used as a “general rule” this this matter. So, before taking the decision to use this legal concept, please take the necessary legal advice.